The Manufacturing Alliance for Productivity and Innovation (MAPI) said that its composite index of manufacturing activity edged slightly higher from 55 in the fourth quarter of 2012 to 56 in the first quarter of 2013. This is the third consecutive quarter where the index has been in the mid-50s, suggesting modest growth in the sector. Readings over 50 indicate an expansion, with sub-50 values suggesting contraction. The uptick in the index this quarter, though, does reverse 10 quarters of decline, which is a definitely a positive sign.
With that said, many of the subcomponents regarding the current economic environment suggest a high degree of weakness in the manufacturing marketplace. The index of current orders shifted from moderate growth in the fourth quarter (57) to a slight contraction in the first quarter (47). This decrease in demand also included exports, with the export orders index dropping from 49 to 45. In addition, just 20.7 percent of manufacturers responding to this survey said that they were operating above 85 percent of their capacity, down from 31.5 percent last quarter.
These data indicate that there is significant softness in the manufacturing sector. Other data points, such as the purchasing managers’ indices from the Institute for Supply Management or Markit, have shown the pace of new orders and exports decelerating, but the MAPI report says that these points are contracting. As such, the MAPI data tend to more closely align themselves with some of the regional sentiment surveys, such as the most recent one from the Kansas City Federal Reserve Bank.
Despite the weaker data on current conditions, manufacturers in the MAPI survey (and others) are cautiously optimistic about the future, helping to lift the overall composite measure. This is especially true for U.S. sales. The prospective U.S. shipments index for the second quarter is 61. While slightly lower than the 63 reading last time, it still indicates decent growth in shipments for the current quarter. Moreover, the non-U.S. prospective U.S. shipments index declined somewhat from 57 to 53, suggesting very modest growth in exports this quarter.
In addition to orders, manufacturers have relatively healthy plans for both capital investments and research and development spending. The indices for these items are all over 60, with the pace of U.S. and non-U.S. investments picking up from the last survey. This indicates that manufacturers are eager to make the right investments in the future that they need to make to succeed in the future – another positive sign.
Chad Moutray is the chief economist, National Association of Manufacturers.
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