Manufacturing activity decelerated in the third quarter, according to the quarterly Manufacturers Alliance for Productivity and Innovation (MAPI) Survey on the Business Outlook – September 2012. The September composite index fell to 56 from 61 in the June 2012 survey.

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 Despite the decline – its ninth straight since reaching a record high of 81 in June 2010 – the  index remains above the threshold of 50, the dividing line that separates contraction and expansion. The drop of 5 percentage points, however, is the largest over the nine-quarter decline and comes on the heels of a 4 percentage point drop in the previous report. 

The survey's composite index is a leading indicator for the manufacturing sector.

“This quarter’s survey results add an exclamation point to the view that manufacturing activity has slowed, but this is not to suggest that it is crashing,” said Donald A. Norman, Ph.D., MAPI senior economist and survey coordinator. “In fact, it is expected to expand, even if at a much slower rate than what we’ve experienced over the past two years.”

The Composite Business Outlook Index is a weighted sum of the Prospective U.S. Shipments, Backlog Orders, Inventory and Profit Margin Indexes. In addition to the composite index, which reflects the views of 60 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.

Twelve of the 13 indexes decreased, including the six current business conditions indexes.

The Inventory Index fell significantly, to 58 in September from 73 in June.

The Current Orders Index, a comparison of expected orders in the third quarter of 2012 with those in the same quarter one year ago, declined to 57 in September from 70 in the June survey.

The Export Orders Index, which compares exports in the third quarter of 2012 with the same quarter in 2011, also saw a double-digit drop, to 53 in the current survey from 63 in June.

The Capacity Utilization Index, which shows the percentage of firms operating above 85 percent of capacity, dropped to 28.8 percent in September from 35.2 percent in June and is now below the long-term average of 32 percent.

The Backlog Orders Index, which compares the third quarter 2012 backlog of orders with that of one year earlier, fell to 53 from 58 in the June report.

The Profit Margin Index slipped only marginally, to 67 in September from 68 in June.

Six of the seven forward looking indexes declined but as a group still remain well above 50, the dividing line between expansion and contraction.

The Prospective U.S. Shipments Index, which reflects expectations for fourth quarter 2012 shipments compared with the fourth quarter of 2011, dropped to 60 in September from 75 in the previous report. The Prospective Non-U.S. Shipments Index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms for the same time frame, fell to 56 in the current report from 60 in the June survey.

In a supplemental section, participants were queried on the potential for the U.S. economy going over the “fiscal cliff” if tax increases and spending cuts are enacted starting January 1, 2013.

Eighty-three percent of the respondents believe that going over the fiscal cliff would have a moderately negative to very negative impact on their company. Just 8.6 percent said the impact would be minimally negative.

Many companies have already responded to the possibility of going over the fiscal cliff. Thirty-four percent of respondent firms have delayed adding to their workforce because of concerns about the fiscal cliff while 17 percent have scaled back or put on hold planned capital investments.

Respondents were asked to indicate what they thought was the biggest threat to the economy. Forty-two percent said the potential spread of the banking crisis in Europe to the United States was the biggest threat, 39 percent cited congressional failure to prevent the fiscal cliff and only 7 percent cited slowing growth in China.