MAPI Business Outlook: Most Indexes Show Marked Improvement

Thursday, October 10, 2013


MAPI Business Outlook

Composite Index Rises From 58 to 66;
Most Individual Indexes Show Marked Improvement

Senior Financial Executives Surveyed on Low
Interest Rates and Tapering

This MAPI Business Outlook reflects the views of 51 senior financial executives in member companies on current and future business conditions. The questionnaire was sent out at the beginning of September and responses were due September 30, 2013.

Part I: September 2013 Survey Results

Business Indexes
The Composite Business Outlook Index increased from 58 in June to 66 in September.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 September 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.

Most indexes improved in September, and several rose significantly. The Current Orders Index jumped from 53 in June to 70 in September. The Prospective U.S. Shipments Index, based on expected fourth quarter shipments, rose from 67 to 76. The Non-U.S. Prospective Shipments Index increased from 60 in June to 70. The Backlog Orders Index rose for the second straight quarter, from 54 in June to 59, while the Profit Margin Index increased from 56 to 68. The Capacity Utilization Index rose from 21.2 to 30.0, just below its long-term average of 32 percent. Also remarkable was the rebound in the Export Orders Index, which increased from 45 in June to 61. The Inventory Index was 49, down from 51 in June. This suggests that companies are neither drawing down nor building inventories.

Each September, respondents are first asked about their expectations for annual orders, U.S. and non-U.S. investment, and R&D spending for the following year as compared to the current year—in this case, 2014 vs. 2013. The Annual Orders Index was a strong 81, indicating that respondents expect orders will increase above 2013 levels next year. The weakest indexes within this group were the U.S. Investment Index at 53 and the Non-U.S. Investment Index at 54. Still, both were above 50, indicating an overall increase in investment spending in 2014. Finally, the R&D Index was 66.

This quarter’s survey results are a break from previous quarters in which a few indexes showed very modest improvement while others declined. The September increase in the composite index and the marked improvement in most individual indexes signal an increase in the pace of manufacturing activity over the next three to six months.

MAPI Forecast of Economic Activity
MAPI updates its economic forecasts four times a year. The most recent forecasts (August 2013) of GDP growth and manufacturing sector growth (total and non-high-tech) are displayed in the table below. The forecast of manufacturing sector activity is consistent with the results in the current MAPI Business Outlook, pointing to slow growth for all of 2013.

Part II: Figures and Tables

Current Business Condition Indexes
This section presents the current business condition indexes from September 2012 to September 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.

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

The distribution of companies sorted by their capacity utilization in the June 2013 and September 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 fourth quarter of 2013 compared with expectations from the same quarter one year earlier. The Interest Rate Expectations Index is based on the expected movement of longer-term interest rates between September 2013 and the end of December 2013.

The remaining indexes for September 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 also include the June 2013 indexes that were based on a comparison of expectations for 2013 compared to 2012 data.

The charts that follow 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 change each September. The trends shown below are based on each year’s index values in September because this comparison provides a consistent year-to-year view on the outlook for activity in the following year.

Part III: Low Interest Rates and Tapering

This quarter’s wildcard questions pertained to some of the impacts low interest rates are having on companies and the timing and effects of the Federal Reserve Board’s intent to taper its quantitative easing (QE) program.

  • Slightly more than 9 out of 10 respondents reported that their companies have seen their pension liabilities increase because of low interest rates, with 56 percent reporting that the increase has been significant.
  • Just over 6 out of 10 companies have had to add to their pension reserves because low interest rates have raised pension liabilities.
  • Six out of 10 companies have benefited from the lower structure of interest rates in that their willingness to borrow has increased.
  • Most companies (84 percent) have not reduced their hurdle rates used for investment decisions.
  • Seven out of 10 respondents do not expect longer-term interest rates on corporate bonds to rise by 200 basis points from their current level until 2015 or thereafter.
  • Most respondents (92 percent) expect that the Fed will begin tapering its QE program before the end of 2014. Twenty-nine percent expect this to happen before the end of 2013, while 43 percent expect that tapering will start in the first half of 2014.
  • Close to two-thirds of the respondents expect that the Fed’s tapering of its QE program will have a moderately negative impact on the economy while 30 percent said there will be little, if any, impact.

The detailed responses to each of the questions are as follows.

  1. If your company has defined benefit pension plans, to what extent have low interest rates increased pension liabilities?
  2. Has your company had to add to its pension reserves because of low interest rates?
  3. Has the lower structure of interest rates benefited your company in terms of its willingness to borrow?
  4. Has your hurdle rate for investment projects been adjusted downward in response to low interest rates?
  5. When do you expect longer-term interest rates on corporate bonds to be 200 basis points higher than their current level?
  6. When do you think the Federal Reserve Board will begin to taper its quantitative easing program?
  7. When the Fed begins to taper its QE program, what impact will this have on the economy?


  • Markets will initially react negatively but if timed correctly, the slight negative drag of ceasing to print money should not be noticeable, as the economic recovery should by that time be a larger magnitude effect.


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  • 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.