The 2020 Mid-Year Economic Update_long

Forecast: Manufacturing Sector Will Face ‘Significant Challenges’ in Near-Term

Mirroring the downturn in the overall U.S. economy, the manufacturing sector is expected to face significant challenges in the near-term according to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook, an indicator for the industrial sector. The June 2008 composite index registered a drop to 50 from 57 as reported in the March 2008. 
 
At this level, the index indicates that overall manufacturing activity is expected to remain flat over the next three to six months. It should be noted, however, that the index measures the direction of change rather than the absolute strength of activity in manufacturing. 
 
While a variety of individual indexes is included in the survey, the business outlook index is a weighted sum of the ...

reflect slowing activity in manufacturing and offer little prospect for an overall increase in activity over the next three months,” said Donald A. Norman, MAPI economist and survey coordinator. “The news, however, is not all bad. The rise in indexes for backlogs, non-U.S. prospective shipments, and non-U.S. investment, coupled with the strength of the indexes for capacity utilization and exports, indicate that most of the manufacturing sector is holding up much better that it did in the last recession largely because non-domestic business continues to grow.”
 
In a supplemental section of the report, senior financial executives reported on the challenges regarding the dramatic and sustained rise in the price of oil and petroleum. A wide majority, 83.3%, characterized the price impact on production costs as moderate or significant compared to 78.8% who indicated the same for logistics. Respondents were asked what assumption regarding the spot price of oil (West Texas Intermediate) in mid-2011 is used for purposes of long-term or strategic planning. Just over half, 53%, indicated they do not have or are not using an oil price assumption in their long-term planning.
 
While no company representatives expect the price of oil to exceed $200 per barrel in three years, 25.8% are planning on a price in the range of $150 to $200 per barrel, and the same percentage foresee prices remaining at the $125 to $149 level. Only 12.9% anticipate prices below $100 per barrel.
 
The survey reflects the views on current and future business conditions of 67 senior financial executives representing a broad range of manufacturing industries.Mirroring the downturn in the overall U.S. economy, the manufacturing sector is expected to face significant challenges in the near-term according to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook, an indicator for the industrial sector. The June 2008 composite index registered a drop to 50 from 57 as reported in the March 2008. 
 
At this level, the index indicates that overall manufacturing activity is expected to remain flat over the next three to six months. It should be noted, however, that the index measures the direction of change rather than the absolute strength of activity in manufacturing. 
 
While a variety of individual indexes is included in the survey, the business outlook index is a weighted sum of the shipments, backlogs, inventories, and profit margin indexes.
 
Four of the 12 individual indexes measured in the survey saw double digit changes.
 
The annual orders index, based on a comparison of expected orders for all of 2008 with orders in 2007, slipped to 50% compared with 68% in the March 2008 survey. The inventory index, based on a comparison of inventory levels in the second quarter with those of one year ago, rose to 69% in June from 54% in March, signaling a sharp buildup in inventories, and representing further evidence of a slowdown in the sector.
 
The quarterly orders index, which compared new orders for the second quarter of 2008 with the same quarter one year ago, fell to 46% from 58%. Finally, the prospective U.S. shipments index, based on expectations of anticipated shipments in the third quarter of 2008 compared with the same quarter last year, declined to 52% from 62% in the previous report.
 
Meanwhile, the profit margin index gave back a more modest five percentage points, falling to 55% in June in relation to 60% in the March report. 
 
Despite the decline in the overall index, however, there were a number of individual indexes that showed underlying strength in the manufacturing sector, especially relating to exports.
 
The prospective non-U.S. shipments index measures expectations for anticipated shipments outside the United States, in this case for the third quarter of 2008 compared to the same quarter of 2007. The index, added for the first time in the March 2008 survey, increased to 89% in June from 80% in March.
 
The backlogs indexcompared the second quarter 2008 backlog of orders with the backlog of orders one year earlier. The June 2008 index of 59% represents an increase from 55% in the March 2008 survey. An accumulation of backlogs usually occurs when new orders exceed shipments and growing backlogs is a potential sign that the slowdown in manufacturing activity has bottomed out.
 
The non-U.S. investment index provides insight into expectations regarding non-U.S. capital expenditures, comparing a firm’s outlook for all of 2008 with 2007. Like the non-U.S. shipments index, this information was gathered for the first time in the March 2008 survey. The June 2008 index was 77%, two points above the 75% in the March survey, and well above the U.S. investment index.
 
The capacity utilization index, based on the percentage of firms operating above 85% of capacity, increased to 41.0% in June 2008 from 38.3% in March 2008. The export orders index, which measures how second quarter 2008 exports compare with those of second quarter 2007, edged up to 73% in June from 72% in the previous survey. 
 
Two indexes remained flat at positive levels of activity. The U.S. investment index, which queried executives on their expectations regarding capital investment in 2008 compared to 2007, held steady at 62%. The research and development (R&D) index asked executives for their insights regarding R&D spending in 2008 compared to 2007. The R&D index remained at 72%.
 
This quarter’s results unequivocally

About the Author
Leave a Reply

Leave a Comment

Sign Up for the MDM Update Newsletter

The MDM update newsletter is your best source for news and trends in the wholesale distribution industry.

By subscribing, you are agreeing to MDM’s Privacy Policy.