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.

"In absolute terms, the individual indexes remain very high, indicating that manufacturing activity continues to grow," said Don Norman, Ph.D., Manufacturers Alliance/MAPI Economist and survey coordinator. "The slight decrease in several indexes is the result of comparisons made between the current quarter and the same quarter one year ago when manufacturing was resurgent."

There was primarily a mix of modest individual advances and declines, leaving the overall index on solid footing.

The biggest move was in the export index, which jumped from 72 percent in September to 89 percent in December, reaching a record high since this index was produced in 1991. This indicates that export orders for most manufacturing industries will be higher in the fourth quarter on a year-to-year basis, likely attributable to the decline of the U.S. dollar as well as solid economic growth in many major markets.

The investment index question asked executives how capital investment in 2005 would compare to investment in 2004. The index improved to 75 percent in this survey from 69 percent in September. Thus, a growing percentage of respondents expect that capital spending in 2005 will exceed spending in 2004. The research and development (R&D) index showed an increase, from 68 percent in September to 75 percent in December, indicating that R&D spending should rise in 2005.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, rose slightly from 28.3 percent in September to 30.8 percent in December, while the percentage of firms operating at less than 75 percent of capacity was just 11.5 percent, down from 15 percent in September. As recently as June 2003, 37.7 percent of the firms in the survey were operating at less than 75 percent.

The forward-looking annual orders index, based on a comparison of expected orders for all of 2005 with orders in 2004, rose marginally from 89 percent in September to 90 percent in December. Eighty-five percent of executives expect orders to rise above their 2004 levels, showing strong optimism that the manufacturing sector will continue to expand this year.

The inventory index climbed from 69 percent in September to 72 percent in December. The fact that inventories are increasing is partly a consequence of the slight slowdown in manufacturing activity in the second half of 2004. But it also reflects a ramping up of production in anticipation that demand will grow throughout the remainder of 2005.

There were modest declines in some indexes.

The orders index, which compares new orders for the fourth quarter of 2004 with the same quarter one year ago, slipped from 92 percent in September to 89 percent in December. The prospective shipments index, based on a comparison of prospective shipments in the first quarter of 2005 with the same quarter last year, remained strong at 86 percent, but was down from 93 percent in September.

The backlog orders index, comparing current backlogs with backlogs one year earlier, decreased from 86 percent in September to 85 percent in December, still a healthy number because it is over 50 percent, showing that backlogs are higher on a year-over-year basis. An accumulation of backlogs usually occurs when new orders exceed shipments.

The profit margin index retrenched from 73 percent in September to 67 percent in December, still remaining well above the 50 percent level and an indication that most firms’ profit margins are higher than one year ago.

Manufacturers Alliance/MAPI members may download—at no cost—the PDF version of Manufacturers Alliance/MAPI Survey on the Business Outlook (ER-580e) by logging in to the Members section of the website and clicking on the link under Economic News.

Non-members may purchase the report for $25 at www.mapi.net.