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ARLINGTON, VA-A new report from the Manufacturers Alliance/MAPI says the manufacturing sector faces significant near-term challenges. According to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook issued July 21, the organization’s June composite business outlook index stood at 50%, a seven-point drop from the previous quarter’s reading.

“Unfortunately, manufacturing continues to underperform the general economy,” says the organization’s chief economist, Daniel J. Meckstroth, who contrasts the 3.7% manufacturing decline with anticipated GDP growth for the quarter of 2% on an annualized basis. “The federal tax rebate checks may help people afford everyday items, but it is not having much impact on housing, motor vehicles, industrial machinery and other big ticket industries,” he continues. “It is the weak dollar that is keeping the floor under manufacturing plants in the United States.”

The organization compiles 12 individual indexes for the manufacturing sector based on a survey of 67 senior financial executives representing a broad range of industries. The business outlook index gives a weighted sum of four of the 12 indexes, including shipments, backlogs, inventories and profit margins. Higher scores shower greater confidence on the part of respondents. The current reading means manufacturing activity is expected to remain flat the next three to six months.

Changes in some of the 12 individual indexes reveal deeper problems in some manufacturing-related areas, with four scores showing troubling double-digit shifts. The annual orders index, based on a comparison of expected orders for all of 2008 with actual orders in 2007, slipped to 50% from 68% in March, while the quarterly orders index, comparing actual levels this year to last, fell to 46% from 58%. The inventory index rose to 69% from 54%, signaling a sharp buildup in inventories, and the prospective US shipments index, based on anticipated shipments for Q3 compared with the same quarter last year, declined to 52% from 62%. The profit margin index showed a more moderate negative change, falling five points to 55%.

Some indexes improved, revealing underlying strength in some aspects of manufacturing, especially related to exports. The prospective non-US shipments index, for example, rose to 89% in June from 80% in March, while the non-US investment index rose two points to 77% and the export orders index edged up one point to 73%. And giving a signal the slowdown in manufacturing activity may have bottomed, the backlogs index rose to 59% from 55%, while the capacity utilization index increased to 41% from 38.3%. Two indexes remained flat, but at positive levels of activity. The US investment index held steady at 62%, and the R&D index remained at 72%.

“This quarter’s results unequivocally reflect slowing activity in manufacturing and offer little prospect for an overall increase in activity over the next three months,” says MAPI economist and survey coordinator Donald A. Norman. “The news, however, is not all bad. The rise in indexes for backlogs, non-US prospective shipments and non-US 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.”

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