Business activity has picked up, and the outlook among manufacturers has strengthened throughout the year, providing positive signs for the industrial recovery as a whole, according to a series of new reports. The latest second-quarter results show that conditions are likely to continue improving, positioning the manufacturing sector at the forefront of the general economic rebound.

According to the NAM/IndustryWeek Manufacturing Index — 2nd Quarter 2010, published by the National Association of Manufacturers and IndustryWeek, 74 percent of manufacturers were optimistic about future prospects in the second quarter of 2010, up from just 28 percent who said the same in Q1 2009.

With the economic recovery underway, optimism is at its highest point since mid-2007. The biggest gain was among those who had a "somewhat positive" outlook, which grew from 55 percent in the first quarter to 61 percent in the second. Meanwhile, those with a "very positive" outlook fell from 14 percent to 13 percent, and those with a "somewhat negative" outlook decreased from 23 percent to 22 percent. Respondents with a "very negative" outlook dropped from 8 percent to 2 percent.

Along with gains in the overall business outlook, expectations for the next 12 months also improved for sales (forecast to grow 3.3 percent), prices (forecast to increase 1.4 percent), investments (forecast to rise 1.7 percent), employment (forecast to grow 1.3 percent) and wages (forecast to increase 1.4 percent).

The Manufacturers Alliance/MAPI's latest quarterly Survey on the Business Outlook also provided positive signs, with the composite business index rising to a record high of 81 percent, breaking the previous high reading of 80 percent from June 2004 and marking the third consecutive quarter the index has come in at 50 percent or above.

"The overall composite index and several forward-looking individual indexes (orders, export orders, and U.S. prospective shipments) achieved new heights and indicate continued recovery in manufacturing," Donald A. Norman, an economist for MAPI and author of the quarterly report, said in an announcement of the findings.

The backlog orders index rose to 87 percent due to new orders exceeding shipments, a sign of strength in demand for manufactured goods, while the export orders index set a new high of 85 percent. The capacity utilization index, based on the percentage of firms operating above 85 percent capacity, rose to 20 percent, up from 9.8 percent the previous quarter.

Despite these positive trends, however, challenges remain.

Fifty-eight percent of respondents to the NAM/IndustryWeek survey said economic uncertainty was likely to delay their plans to increase employment and capital spending, while only 26 percent reported their hiring and investment plans were unaffected.

The main causes of uncertainty: the state of the nation's economic recovery (46 percent), possible legislative or regulatory changes by the government (37 percent) and the state of the global economy (17 percent).

"We should remain cautious [...] because many of the individual indexes are based on year-over-year comparisons," Norman advised. "Manufacturing sector production fell sharply during the second quarter of 2009; a broad-based increase in production from the production trough reached at the end of the second quarter of 2009 would naturally lead to an increase in these indexes. Still, the broad-based strength in the composite index and the individual indexes point to further expansion in the next three to six months."

A major factor in future business conditions is the amount of funds companies have held back while trying to weather economic instability. Outside the financial sector, an estimated $1.8 trillion remains unspent, and this could provide a significant influx of new expenditures and jobs.

"The big question is whether companies will stop hoarding cash and start spending more to expand their operations and hire freely," the Associated Press reports. "They're likely to do that only after they feel confident that demand from their customers will justify the cost of new hires."

Resources

The NAM/IndustryWeek Manufacturing Index — 2nd Quarter 2010
National Association of Manufacturers / IndustryWeek, 2010

The NAM/IndustryWeek Manufacturing Index — 1st Quarter 2010
National Association of Manufacturers / IndustryWeek, 2009

MAPI Survey on the Business Outlook - June 2010
by Donald A. Norman
Manufacturers Alliance/MAPI, July 15, 2010

MAPI Survey on the Business Outlook: Index Sets Record as Recovery Continues in Industrial Sector
Manufacturers Alliance/MAPI, July 15, 2010

Hope for Economy in Strong Manufacturing Reports
by Christopher S. Rugaber and Alan Zibel
The Associated Press, July 22, 2010