Business Outlook Index hits second straight all-time high. Executives expect hiring increase.

April 19, 2004

According to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook released April 8, the long-awaited recovery in the U.S. manufacturing sector is expected to continue to gain steam in the near term. The March 2004 index of 78 is the highest in the survey's 32-year history and surpasses the previous high of 77 in December 2003. The composite business outlook index was produced semiannually starting in March 1972, before being compiled quarterly since September 1991.

In a related issue, employment prospects in manufacturing seem to be improving for 2004, with positive results possible as early as the second quarter.

A composite business index above 50 indicates that overall manufacturing activity is expected to increase over the next three months. It should be noted, however, that the index measures the direction of change rather than the absolute strength of activity in manufacturing.

Nearly all components of the index maintained the high levels achieved in the previous quarter, including orders, prospective shipments, backlogs, exports, and profit margins. The inventory index rose from 44 percent to 46 percent. Because the index is below the 50 percent level, overall inventories were lower than one year ago. Since inventories continue to be lean, most analysts expect production will expand to handle growing orders as well as to replenish and maintain inventories.

The one index that slipped measurably from the previous survey was the investment index. It dropped from 81 percent to 69 percent. However, at 69 percent the index signifies that capital spending in 2004 should exceed its 2003 level.

"The significance of the March survey results is that the surprising strength shown in the previous quarter's survey was repeated for a second straight quarter," said Donald A. Norman, Ph.D., Manufacturers Allisance/MAPI economist and survey coordinator. "This adds confidence to expectations that manufacturing sector activity will expand in 2004."

Executives also were surveyed on the manufacturing employment outlook. More than one-third, 36.2 percent, indicated that employment would increase moderately or significantly in 2004 compared to 25.9 percent who said employment would fall. Employment increases may be seen as early as the second quarter, in which 27.5 percent expect a moderate or significant bump in hiring compared to 17.2 percent who indicated employment in the sector will decrease.

Among the factors cited by executives who indicated employment would be stable or fall were productivity gains (84 percent), followed by offshoring and sourcing more parts and production from abroad. Each received 27 percent. Respondents could choose more than one answer.

An overwhelming majority said the most important factor driving labor costs in the U.S. was health care costs (76 percent), followed by pension costs (10 percent). Respondents also were asked whether employment in specific categories would increase, decrease, or stay the same. Employment is expected to increase in assembly, technical, temporary workers, and machining/production. Conversely, employment is expected to decrease among supervisors and middle-level managers.

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