‘No longer in a freefall’
The road to recovery in the manufacturing sector will likely be slow, arduous, and painstaking, but there is some evidence that the worst has passed, according to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook for June 2009, a leading indicator for the industrial sector. The June 2009 composite index rose to 24 from an historic low of 21 reported in the March 2009 report.
At 24, the index indicates that overall manufacturing activity is expected to contract over the next three to six months. While the index is at its second lowest level since the survey originated in March 1972, it marks the first time it has shown improvement since June 2007. The survey was conducted on a semi-annual basis from 1972 to 1991 before being conducted on a quarterly basis in 1991. It should be noted, however, that the index measures the direction of change rather than the absolute strength of activity in manufacturing.
The June 2009 index of 24 marks the fourth consecutive quarterly reading below 50, the demarcation point between growth and contraction, and pales in comparison to one year ago when the June 2008 index registered at the 50 mid-point.
"The small rise in the composite index and the improvement in a few of the individual indexes indicate that the manufacturing sector is no longer in a freefall," said Donald A. Norman, Ph.D., MAPI Economist and survey coordinator, "even as the forward looking indexes point to lower activity over the next three to six months." Norman noted that most of the individual indexes are based on year-over-year comparisons. A year ago manufacturing activity was down somewhat, but still at a relatively high level. Given the sharp fall in activity over the past nine months, it is hardly surprising that year-over-year comparisons have resulted in sharp declines in the indexes.
While a variety of individual indexes are included in the survey, the business outlook index is a weighted sum of the shipments, backlogs, inventories, and profit margin indexes.
Seven of the 12 individual indexes measured in the survey fell to all-time lows, but only slightly and none by more than five points. The declines were offset somewhat by improvement in other areas. In the March 2009 survey, 11 of the 12 indexes reached all-time lows.
The brightest news may have come in the inventory index, based on a comparison of inventory levels in the second quarter of 2009 with those of one year ago. It dropped to 15% in June from 37% in March, indicating that manufacturers are making substantial progress in paring an inventory overhang.
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 2009 compared to the same quarter of 2008, rose to 15% from 8%. The export orders index, which measures how second quarter 2009 exports compare with those of second quarter 2008, increased to 11% in June from 8% in the March survey.
The quarterly orders index, which compared new orders for the second quarter of 2009 with the same quarter one year ago, edged up to 6% from 4% in the previous survey. The U.S. investment index, which queried executives on their expectations regarding capital investment in 2009 compared to 2008, held steady at 14% in June from the March report.