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Despite some concerns with current business conditions, near-term prospects for the manufacturing sector look bright, according to the quarterly Manufacturers Alliance for Productivity and Innovation Business Outlook.
The March composite index improved to 69 from 67 in the December survey – the fifth straight quarterly advance and the highest level since the March 2011 reading of 72. For 18 quarters, the index has remained above the threshold of 50, the dividing line separating contraction and expansion.
The survey’s composite index is a leading indicator for the manufacturing sector.
“The continued improvement in the composite index and the rise in all of the forward looking individual indexes signal growing confidence that manufacturing activity in 2014 will exceed its 2013 level,” said Donald Norman, MAPI senior economist and survey coordinator.
The Composite Business Outlook Index is based on a weighted sum of the prospective U.S. shipments, backlog orders, inventory and profit margin indexes. The views of 57 senior financial executives representing a broad range of manufacturing industries are segmented into 12 individual indexes split between current business conditions and forward looking prospects. Of those 12 indexes, nine increased and three declined.
Current Business Condition Indexes
The inventory index,based on a comparison of inventory levels in the first quarter of 2014 with those in the first quarter of 2013, increased to 66 in March from 61 in December. The upward trend indicates an ongoing inventory build.
The export orders index, which compares anticipated exports in the first quarter of 2014 with those of one year prior, dropped to 60 from 67.The backlog orders index rose to 69 from 64.
The profit margin index decreased to 66 in March from 72 in December. The current orders index dipped slightly to 71 from 72 in the previous report.
The capacity utilization index,which measures the percentage of firms operating above 85 percent of capacity, saw a significant increase, climbing to 35.7 percent in March from 27.3 percent in December. Its long-term average is 32 percent.
Forward Looking Indexes
All six forward looking indexes showed strength.
The non-U.S. investment index, which forecasts investment abroad, experienced an 18-point gain to 59 in the current survey. The U.S. investment index, based on executives’ expectations regarding domestic capital investment for 2014 compared to 2013, rose to 59 from 54 in the previous survey.
The prospective U.S. shipments index, which reflects expectations for second quarter 2014 shipments compared with those in the second quarter of 2013, increased to 88 in the current survey from 79 in December. The prospective non-U.S. shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms for the same period, advanced to 81 in March from 72 in the previous report.
The research and development spending index improved to 69 in March from 61 in December; this index compares anticipated spending for the years 2013 and 2014. The annual orders index, which is based on a comparison of expected orders for all of 2014 with orders in 2013, was at 89, an increase from 86 in the December survey.
In a supplemental section, participants were asked about the impact of policy uncertainty on investment spending. Most respondents indicated that uncertainty is not, at least currently, a significant factor holding back investment.
Forty-two percent reported that their companies’ capital spending will rise in 2014 while 43 percent said it will be approximately equal to last year’s spending. Seventy-nine percent of respondents indicated that increased policy uncertainty during the last two years did not contribute to lower spending.
The three most important sources of policy uncertainty were reported to be monetary policy, calls for changes in corporate tax policy and environmental regulations.