Quarterly Outlook: Moderate Industrial Sector Growth to Continue

Continued growth is expected for the industrial sector, according to the latest quarterly Manufacturers Alliance for Productivity and Innovation (MAPI) Survey on the Business Outlook – December 2011. However, that growth will be at a more moderate pace during the first half of 2012.

The survey's composite index is a leading indicator for the manufacturing sector. The December 2011 composite index fell slightly, to 66 from 67 in the September report, yet manufacturing's staying power seems evident in the face of an uncertain economy. This is the ninth consecutive quarter the index has been above the threshold of 50, the dividing line that separates contraction and expansion. Despite the sixth straight decrease from the record high of 81 in June 2010, the index remains consistently high, averaging 70.8 during that period. The index started as a quarterly series in 1991.

"Despite the challenges posed by slower economic growth and continued problems in the construction and financial sectors, the manufacturing sector is the 'Energizer Bunny' of the U.S. economy," said Donald A. Norman, Ph.D., MAPI economist and survey coordinator. "Barring a meltdown in the Eurozone, the U.S. manufacturing sector should continue growing at a moderate pace heading into 2012."

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, which reflects the views of 64 senior financial executives representing a broad range of manufacturing industries, the survey includes 13 individual indexes that are split between current business conditions and forward looking prospects.

The six current business condition indexes all showed declines but remain at relatively high levels.

The quarterly orders index, based on a comparison of expected orders in the fourth quarter of 2011 with those in the same quarter one year ago, fell to 70 in December from 79 in the September survey. The export orders index, which compares exports in the fourth quarter of 2011 with the same quarter in 2010, was 71 in the current survey, moving down from 80 in September.

The backlog orders index, which compares the fourth quarter 2011 backlog of orders with the backlog of orders one year earlier, fell to 67 from 73 in the previous report; declining backlogs signal slowing activity. The profit margin index slipped to 70 in December from 74 in September.

Based on a comparison of inventory levels in the fourth quarter of 2011 with those in the fourth quarter of 2010, the inventory index decreased to 73 in December from 74 in September. Norman, however, views this as a relatively positive sign since it suggests that the steady inventory build observed over the past year is slowing.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, also showed some softening. It retrenched to 38.1 percent in December from 43.3 percent in September. Still, the index is well above the long-term average utilization rate of 32 percent.

There was, however, some improvement in the forward looking indexes.

The annual orders index, based on a comparison of expected orders for all of 2012 with orders in 2011, improved to 86 in December from 84 in September, thus remaining at a robust level. The U.S. prospective shipments index, which reflects expectations for first quarter 2012 shipments compared with the first quarter of 2011, advanced to 83 in December from 81 in the previous report.

The research and development (R&D) index surveys participants regarding R&D spending in 2012 compared to 2011. The R&D index was 77 in the December report compared to 76 in September.

The non-U.S. prospective shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms in the first quarter of 2012 compared to the same quarter in 2012, was the lone index to reflect a double-digit downturn, dropping to 71 in the current report from 85 in the September survey.

The U.S. investment index is based on executives' expectations regarding domestic capital investment for 2012 compared to 2011. The index was 73 in December, down from 81 in September. The non-U.S. investment index, based on expectations regarding capital expenditures abroad in 2012, was 72 in the current report compared to 75 in September.

Finally, the interest rate expectations index was 63, up from 48, indicating the sentiment that longer-term interest rates are expected to rise by the end of the first quarter of 2012. In a supplemental section, participants were queried on the volatility of the euro and the problems in the Eurozone economies attributable to the sovereign debt crisis.

Forty-four percent said that the rate of growth in their exports to the Eurozone has slowed, while 16 percent said their exports are declining; 97 percent believe the Eurozone will experience a recession in 2012, with views almost evenly split as to whether a recession would be mild or moderate. Additionally, 57 percent expect the configuration of the Eurozone will remain intact while 41 percent see it surviving but with fewer member countries.

Seventy-five percent of respondents indicated that their companies do not yet anticipate making any significant changes in the Eurozone and 95 percent said the Eurozone crisis has led to a negative impact on revenues and profitability, although most characterize this impact as minimal.