The 2020 Mid-Year Economic Update_long

Manufacturing Growth May Moderate

similar to last year, dropping to 70 percent in September 2006 from 72 percent in September 2005.

Although the composite index and several individual indexes point to slower growth, several indexes’notably exports and capacity utilization’rose,” said Daniel J. Meckstroth, Ph.D., Manufacturers Alliance/MAPI chief economist. “Further, all of the indexes remain well above the 50 percent level, indicating that the overall manufacturing sector will continue expanding over the next three to six months.”

Seven of 10 factors measured in a recent survey were lower than in a previous report, confirming the downward trend of other recent economic indicators. Some rose, however, including the exports orders, capacity utilization and profit margin indexes.

The three-year growth acceleration in the industrial sector is expected to hit a modest speed bump in the next three to six months, according to the Manufacturers Alliance/MAPI Survey on the Business Outlook.

The September 2006 composite index of 64 is down from 71 reported in the June 2006 survey. The number is the lowest since an index of 60 was recorded in the June 2003 survey, but continues to indicate that the industrial component of the U.S. economy remains on a growth trajectory.

The survey reflects the views on current and future business conditions of 64 senior financial executives representing a broad range of manufacturing industries. While a variety of indexes are included in the survey, the business outlook index is a weighted sum of shipments, backlogs, inventories, and profit margin indexes.

A composite business index above 50 indicates that overall manufacturing activity is expected to increase over the next three months 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.

Seven of the 10 factors measured by the quarterly survey were lower than the previous report, confirming the downward trend of other recent economic indicators, but three indexes did show increases, and one hit a near all-time record.

The exports orders index, which measures how third quarter 2006 orders are expected to compare with those of third quarter 2005, rose to 75 percent from 73 percent in the June survey, and the profit margin index edged up to 75 percent from 74 percent in the previous report.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, increased to 50.8 percent in September from 41.3 percent in June. This is close to its record high of 51.0 percent and well above its long-term average of 32.4 percent. The capacity utilization index has been compiled on a quarterly basis since 1991.

As might be expected in the softening manufacturing environment, however, the remaining indexes show some retrenchment, yet all still remain above 50 percent.

The investment index in the September survey asked executives for their initial insights regarding capital investment in 2007 compared to 2006. The index dropped 14 points, to 56 percent, from 70 percent a year ago, another sign of a potential slowdown in the rate of growth of manufacturing activity.

Two additional indexes also encountered somewhat significant changes. The inventory index jumped to 73 percent in September from 62 percent in June, indicating inventories to be higher on a year-to-year basis. The prospective shipments index, based on expectations of prospective shipments in the fourth quarter of 2006 with the same quarter last year, decreased to 73 percent in September from 83 percent in the June survey.

The forward-looking annual orders index, based on a comparison of expected orders for all of 2007 with orders in 2006, decreased to 80 percent in September from 83 percent in September 2005. The backlogs index, comparing third quarter 2006 backlogs with backlogs one year earlier, dipped to 71 percent in September from 75 percent in the June survey. An accumulation of backlogs usually occurs when new orders exceed shipments.

The orders index, which compares new orders for the third quarter of 2006 with the same quarter one year ago, showed a similar moderation, falling to 77 percent in September from 81 percent in June. The research and development (R& D) index determines how executives see R& D expenditures in 2007 compared with those of 2006. This index was

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