Current economic conditions continue to provide relatively smooth sailing for the manufacturing sector though marginal softening may be on the horizon, according to the quarterly MAPI Business Outlook, a survey conducted by the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation.

The survey’s composite index is a leading indicator for the manufacturing sector. The June 2014 composite index improved to 71 from 69 in the March 2014 survey—the sixth straight quarterly advance and the highest level since the March 2011 reading of 72. For 19 consecutive quarters, the index has remained above the threshold of 50, the dividing line separating contraction and expansion.

“The increase in this quarter’s composite index and most of the individual indexes, coupled with the relatively high levels of most indexes, support our expectation of moderate growth in manufacturing sector activity throughout the rest of 2014,” said Donald A. Norman, Ph.D., MAPI Foundation senior economist and survey coordinator. 

The Composite Business Outlook Index is based on a weighted sum of the Prospective U.S. Shipments, Backlog Orders, Inventory, and Profit Margin Indexes. In the report, the views of 51 senior financial executives representing a broad range of manufacturing industries are segmented into 12 individual indexes split between current business conditions and forward looking prospects. Of those 12 indexes, 6 increased and 6 declined.

Current Business Condition Indexes

The Current Orders Index, which compares orders in the second quarter of 2014 with the second quarter of 2013, rose to 78 from 71 in the previous report. The Export Orders Index, which compares anticipated exports in the second quarter of 2014 with those of one year prior, also increased seven points, to 67 from 60.

The Profit Margin Index increased to 70 in June from 66 in March while the Backlog Orders Index advanced to 72 from 69.

The Inventory Index, based on a comparison of inventory levels in the second quarter of 2014 with those in the second quarter of 2013, decreased to 59 in June from 66 in March. This downward trend suggests that inventories are being drawn down as orders increase. 

The Capacity Utilization Index, which measures the percentage of firms operating above 85% of capacity, fell to 30.0% in June from 35.7% in March. This index, which tends to be somewhat volatile, remains close to its long-term average of 32%.

Forward Looking Indexes

Forward looking indexes were mixed but still showed strength.

The U.S. Investment Index, based on executives’ expectations regarding domestic capital investment for 2014 compared with 2013, shot up to 67 from 59 in the previous survey. The Non-U.S. Investment Index, which forecasts investment abroad, rose to 64 from 59.

The Prospective U.S. Shipments Index, which reflects expectations for third quarter 2014 shipments compared with those in the third quarter of 2013, decreased to 87 from 88 in March. The Prospective Non-U.S. Shipments Index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms for the same period, fell to 76 in June from 81 in the previous report. Both indexes are still performing at impressive levels.

The Research and Development Spending Index, comparing anticipated spending in 2014 with 2013, slipped to 67 from 69 in March. The Annual Orders Index, which is based on a comparison of expected orders for all of 2014 with orders in 2013, was 81, down from a robust 89 in March.

Indicators, Planning, and Investment

To close out the survey, participants were queried on the economic indicators and forecasts their firms use to facilitate planning and investment decisions.

Industry-specific and GDP growth forecasts are the most widely followed indicators for planning purposes, with a majority of companies using these tools.

Most respondents rely on internal staff analyses when making investment decisions. Nearly half use leading indicators correlated with company products or follow statistics on current business conditions such as factory orders, auto sales, and housing starts.

To download the MAPI Business Outlook June 2014, click here.