MAPI Business Outlook: Most Indexes Show Continued Improvement

Thursday, January 16, 2014

MAPI Business Outlook

Composite Index Rises From 66 to 67;
Most Individual Indexes Show Continued Improvement

Senior Financial Executives Surveyed on
Finance Function Staffing


Need to Know . . .

  • The Composite Business Outlook Index increased from 66 in September to 67
  • Most individual indexes showed continued improvement in December, including those for Current and Prospective Shipments, Annual Orders, Export Orders, Backlog Orders, U.S. Investment, and Profit Margins
  • The Capacity Utilization Index edged down from 30.0% to 27.3% while the Inventory Index jumped from 49 to 61. The latter indicates that inventories are rising

This MAPI Business Outlook reflects the views of 46 senior financial executives in member companies on current and future business conditions. The questionnaire was sent out at the beginning of December and responses were due December 31, 2013.

Part I: December 2013 Survey Results

Business Indexes
The Composite Business Outlook Index increased from 66 in September to 67 in December.1 The composite index is well above 50, the dividing line between expansion and contraction, and points to continued expansion over the next three to six months. Figure 1 shows the historical trend in the Composite Business Outlook Index through December 2013. The Federal Reserve’s industrial production index for the manufacturing sector (based on annualized quarterly growth rates) is also shown. In general, the latter closely tracks the Composite Business Outlook Index. A rise or fall in the composite index is typically followed by an even sharper rise or fall in the overall industrial production index for manufacturing.

Composite Business Outlook Index

Most indexes showed continued improvement in December. The Current Orders Index increased from 70 in September to 72 in December. The Prospective U.S. Shipments Index, based on expected shipments in the first quarter of 2014, rose from 76 in September to 79, a very high level. The Non-U.S. Prospective Shipments Index increased from 70 to 72. The Backlog Orders Index increased for the third straight quarter, from 59 in September to 64 in December, and the Profit Margin Index rose from 68 to 72. The Export Orders Index increased from 61 to 67.

The Capacity Utilization Index edged down from 30.0% to 27.3%. Its long-term average is 32%. The Inventory Index jumped from 49 to 61; this increase is consistent with recent national income data and indicates an inventory build.

A number of indexes are based on expectations for all of 2014 compared with 2013. The Annual Orders Index rose from 81 in September, a very high level, to 86. This increase is indicative of growing confidence in the outlook for 2014. The U.S. Investment Index inched up from 53 to 54, but the Non-U.S. Investment Index fell sharply from 51 to 42. Finally, the R&D Spending Index declined from 66 to 61 but still remains well above 50, indicating an overall increase in R&D spending in 2014.

Overall, this quarter’s survey results build on the gains reported in the September survey. The increase in the composite index and the continued improvement in most individual indexes signal that there is momentum pushing manufacturing activity and that activity is expected to increase over the next three to six months. The results also suggest that the manufacturing sector has reason for optimism for all of 2014.

MAPI Forecast of Economic Activity
MAPI updates its economic forecasts four times a year. The most recent forecasts (November 2013) of GDP growth and manufacturing sector growth (total and non-high-tech manufacturing) are displayed in the table below. The forecast of an improvement in the manufacturing sector growth rate is consistent with the results in the current MAPI Business Outlook.

Forecasts of GDP and Manufacturing Sector Growth

Part II: Figures and Tables

Current Business Condition Indexes
This section presents the current business condition indexes from December 2012 to December 2013. Each is based on comparisons of responses in the current quarter with those of the same quarter one year earlier. The separating point between expansion and contraction is 50; when, for example, the Current Orders Index exceeds 50, current orders are up on a year-over-year basis. The charts accompanying each table depict the historical quarterly values for that index.

Current Orders Index—Fourth Quarter 2013

Export Orders Index

Backlog Orders Index

Profit Margin Index

Inventory Index

The Capacity Utilization Index measures the percentage of companies operating above 85% of capacity.

Capacity Utilization Index

The distribution of companies sorted by their capacity utilization in the September 2013 and December 2013 surveys is presented in the table below.

Forward Looking Indexes

The indexes in this section are forward looking. The two prospective shipments indexes (U.S. and non-U.S.) are based on expected orders in the first quarter of 2014 compared with expectations in the same quarter one year earlier. The Interest Rate Expectations Index is based on the expected movement of longer-term interest rates between December 2013 and the end of January 2014.

The remaining indexes are based on expectations for all of 2014 compared with 2013. Starting in September of each year, survey respondents are asked how annual orders, U.S. and non-U.S. investment, and R&D spending in the current year are expected to compare with the following year. In the current survey, for example, respondents were asked how expected annual orders in 2014 will compare with those in 2013. A comparison of these measures of activity for the same two years continues each quarter until the following September, when the years on which the various comparisons are based shift forward. The tables shown below include responses from the September and December surveys pertaining to the outlook for 2014.

The accompanying charts provide a picture of the historical trends for the forward looking indexes. The reference points for the Annual Orders, U.S. Investment, Non-U.S. Investment, and R&D Spending Indexes are based on results from each year’s December survey.

Prospective U.S. Shipments Index—First Quarter 2014

Prospective Non-U.S. Shipments Index—First Quarter 2014

Interest Rate Expectations Index

Annual Orders Index

U.S. Investment Index

Non-U.S. Investment Index

Research and Development Spending Index

Part III: Staffing the Finance Function

This quarter’s wildcard questions dealt with issues associated with the staffing of the finance function.

  • While 41% of the survey respondents indicated that they will lose 5% or less of their finance staff over the next three years, 30% expect that 11% or more of those employees will leave or retire during that period.
  • Seventy-one percent of the respondents said it will be moderately difficult to replace departing finance personnel.
  • When looking for new finance personnel, 76% of the respondents report using job search firms. Many look internally and/or use postings on the company website or internet sites such as LinkedIn.
  • The positions that are most difficult to fill are those for financial analysts and tax specialists.
  • A smaller pool of job candidates with the requisite skills and candidates’ reluctance to relocate are the two primary reasons for difficulty recruiting new personnel. These two factors were cited by a total of 68% of respondents.
  • In response to difficulties in hiring, 52% of the respondents indicated that their companies are increasing salaries while 41% reported instituting training and development programs for finance personnel.
  • Competitive salaries and attractive locations are the main reasons some respondents say they are not having difficulty filling positions.
  • Just over two-thirds of the respondents (68%) indicated that their companies are not planning to increase finance staffing levels in 2014, while 25% have plans to expand.

The detailed responses to the questions on staffing the finance function are as follows.

  1. What percent of your finance function staff do you expect will leave or retire over the next three years?

     

  2. How would you characterize the difficulty in replacing departing finance personnel over the next three years?

     

  3. Where do you tend to look for people to fill non-entry-level finance positions? (Check all that apply.)

     

  4. Are you having difficulty recruiting staff in any of the following categories or areas? (Check all that apply.)

    Other:
    • Business development
    • Government accounting expertise

       

  5. If you are having difficulty or expect difficulty in recruiting staff for the finance function, what is the primary reason?

     

  6. If you are having difficulty recruiting financial staff, what—if anything—are you doing about it? (Check all that apply.)

    Other:
    • Selling greater breadth of responsibility
    • Utilizing multiple recruiters for each open position

       

  7. If you are not having difficulty recruiting staff, what are the primary reasons? (Check all that apply.)

    Other:
    • We rotate many senior staff and this allows for more promotion and development at lower levels. We are also generally shrinking in staff size
    • Success and growth of company and opportunity for advancement

       

  8. Do you plan to increase the size of your finance staff in 2014?

 

(Download EO-136 PowerPoint slides here, for members only. Login required.)

  • 1. The Composite Business Outlook Index is based on a weighted sum of the Prospective U.S. Shipments, Backlog Orders, Inventory, and Profit Margin indexes. When the composite index is greater than 50, manufacturing production is expected to increase over the next three to six months.