MAPI: Industrial sector growth slows

The results of the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook point to continued growth in the industrial sector but at a slower rate than over the past 12 months.

The June 2011 composite index fell to 68 percent from 72 percent in the March report. This is the seventh consecutive quarter the index has been above the 50 percent threshold, the dividing line that separates contraction and expansion, but it also represents the fourth straight decline from the record high 81 percent one year ago. The index started as a quarterly series in 1991.

"Although a number of individual indexes declined, they remain at relatively high levels," said Donald A. Norman, Ph.D., MAPI economist and survey coordinator. "Overall manufacturing sector activity remains fairly robust even if the rate of expansion is slowing."

The composite business outlook index is a weighted sum of the U.S. shipments, backlog orders, inventory, and profit margin indexes. In addition to the composite index, the survey includes 12 individual indexes. Other than a double digit decrease in the orders index, there were no dramatic shifts in the individual indexes between the March and June surveys.

The research and development (R&D) index reflects the views of survey participants regarding R&D spending in 2011 compared to 2010. The R&D index reached a record high of 83 percent in the June survey, a solid increase from 75 percent in March.

The export orders index, which compares exports in the second quarter of 2011 with the same quarter in 2010, saw a record high 87 percent in June from 80 percent in March. The non-U.S. prospective shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms in the third quarter of 2011 compared to the same quarter in 2010, increased to a record tying 89 percent from 84 percent.

Smaller gains came in the profit margin index, which rebounded to 78 percent in June from 76 percent in March, and in the capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, which edged up to 32.3 percent in June from 30.7 percent in March. The index continues to hover around the long-term average utilization rate of 32 percent after reaching a record low of 7 percent as recently as December 2009.

On the cautionary side, one component hinting at slowing activity is the inventory index. Based on a comparison of inventory levels in the second quarter of 2011 with those in the second quarter of 2010, the index increased to a record high 82 percent in June from 79 percent in March.

The quarterly orders index, based on a comparison of expected orders in the second quarter of 2011 with those in the same quarter one year ago, also showed weakness, decreasing to 79 percent in June from 91 percent in March.

The U.S. prospective shipments index, which reflects expectations for third quarter 2011 shipments compared with the third quarter of 2010, dropped to 82 percent in the June survey from 89 percent in the March report. The annual orders index, based on a comparison of expected orders for all of 2011 with orders in 2010, slipped to 86 percent in June from 90 percent in March.

The backlog orders index, which compares the second quarter 2011 backlog of orders with the backlog of orders one year earlier, fell to 80 percent from 83 percent. Declining backlogs signal slowing activity.

The non-U.S. investment index, based on expectations regarding capital expenditures abroad in 2011, was 77 percent in June compared to 79 percent in March. The U.S. investment index is based on expectations of executives regarding domestic capital investment for 2011 compared to 2010. The index was 78 percent, a nominal retreat from 79 percent in the previous survey.

In a supplemental component of the survey, respondents were asked about their companies' investment in U.S. capacity.

Most companies, 64 percent, neither opened nor closed U.S. plants over the past year. One-fourth of the companies, however, closed a total of 27 plants. Just over 10 percent of the companies surveyed have plans for relocating plants back to the United States. Forty-four percent of the companies increased the capacity of their U.S. plants by an average of 9.8 percent over the past year, while 17 percent reduced capacity by an average of 12.7 percent.

The June survey indicates continued growth in capital spending. Most firms, 82 percent, are planning to increase capital outlays for existing U.S. plants over the next 12 months, and capital spending is expected to rise by 10 percent or more in 40 percent of these companies.

The need for equipment repair and replacement and the desire to modernize equipment to increase productivity were noted as the top two reasons for capital spending over the past year. As for the most important factors that might discourage capacity investments, survey respondents listed federal tax policy, U.S. wage levels, and government regulations in rank order.

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