The Economy

Manufacturing Business Index Reaches Record High

Dec. 21, 2004

Data portend increase in output during the next three to six months, says Manufacturers Alliance/MAPI.

The composite index of future business activity calculated by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group, reached 77 last month, up nine points from September 2003's 68 and the highest level reached in the index's 31-year history. The index indicates that U.S. manufacturing output should increase during the next three to six months. The previous index high was 76 in March 1973, when the business outlook index was compiled semiannually; the index has been compiled quarterly since 1991. "The expected expansion in manufacturing activity is consistent with current economic forecasts showing gross domestic product . . . increasing by about 4% in 2004," states Donald A. Norman, the Manufacturers Alliance/MAPI economist who oversees the group's business outlook survey and prepares the quarterly report. "This quarter's survey indicates that the manufacturing sector will be a participant in -- and contributor to --overall economic growth." The composite index, based on a survey of senior financial officers in manufacturing companies, is a weighted sum of shipments, backlogs, inventories and profit margins. An index figure above 50 suggests the manufacturing sector of the U.S. economy generally is growing; a figure below 50 indicates that manufacturing is expected to contract during the next calendar quarter. Some 52 executives of Manufacturers Alliance/MAPI member companies participated in the most recent survey, which was distributed in early December 2003 with responses due by Jan. 5, 2004. Looking at the details of the composite index, the index of prospective shipments -- how the executives expect shipments for the first quarter of 2004 to compare with those for the first quarter of 2003 -- rose to 91% in December. In September, the comparable year-to-year figure was 80%. "The percentage of respondents expecting shipments to rise increased from 67% in September to 85% in December, while just 4% expect shipments to be lower," Norman reports. The remaining 11% judged shipments would be about the same. The quarterly backlogs index also increased, rising to 80% in December from 69% in September, indicating that overall backlogs are higher now than they were a year ago. "An accumulation of backlogs -- and a rising backlogs index -- usually occurs when new orders exceed shipments. Thus, the rising backlogs index is a positive sign," Norman explains. The overall inventory index rose to 44% in December from 33% in September, suggesting that stocks are less lean. However, "although the index rose, the fact that the index remains below the 50% level indicates that inventories are lower than one year ago," stresses Norman. Indeed, he relates that just 20% of the executives reported higher inventories, while 33% said their inventories were lower. Forty-seven percent reported them about the same as a year ago. The profit margin index surged between September and December, rising from 45% to 66%. "At 66%, the index indicates that profit margins currently are above their level in December 2002, when profit margins were depressed," states Norman. Three measures of manufacturing activity not included in the composite index also are worth attention. First, the annual orders index, which compares 2003 orders with expected orders in 2004, rose to 96% in December from 88% in September, a clear indication that most manufacturers expect orders to rise this year. Second, the percentage of companies operating at less than 75% of capacity decreased to 21.6% in December from 36.5% in September, "suggesting increased activity by firms that were particularly impacted by the recession in the manufacturing sector," says Norman. (It's also the second consecutive quarter that capacity utilization among the surveyed manufacturing firms has improved.) Third, the investment index, which compares year-to-year capital spending, rose to 81% in December from 64% in September. "This is the highest level reached by this index in the past 30 years, and its level indicates that capital spending should rise in 2004, thereby contributing to the [U.S.] economy's recovery," says Norman.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.