By Michael K. Evans, Ph.D.

The November APICS Business Outlook Index rebounded slightly to 48.2 from 45.1, but still remained below 50, indicating that the manufacturing sector is now growing at below-average rates. The current component fell to 49.0 from 50.6, while the future component improved to 46.7 from an unusually low level of 39.5 in October.

The only remaining strong component in the index is employment, which climbed to 54.9, up marginally from 53.5 in October. Many manufacturing firms are continuing to fill positions that have been vacant because of a shortage of qualified employees.

In contrast, the index for current production remained virtually unchanged at 48.5, compared to 48.8 in October, while the index for production planning slipped to 44.8 from 47.9. Inventory stocks have been rising as shipments have been falling, resulting in a sharp increase in the actual-to-desired inventory/sales ratio.

The index component for new orders rebounded to 52.6 from 36.9 this month, but has averaged only 46.3 over the past four months, indicating an overall decline in new orders over that time.

Since August, the APICS index has averaged 48.8, compared to an average value of 53.0 for the previous four months. These numbers indicate that while manufacturing activity is still expanding, the annual rate of increase now and for the next few months will be no more than 2 percent, compared to a 4 percent growth rate earlier this year.


Current Conditions Components

• Manufacturing Shipments fell sharply in November for the second month in a row, declining an estimated 1 percent, according to the APICS survey. The advance figures from the Commerce Department indicated a 0.7 percent drop for October, compared to the APICS report of a 0.6 percent decline last month.

• Manufacturing Employment is the only component of the index that remains robust. This represents the lagging response of employment to previous robust gains in production. The APICS number of 53.5 indicates a 10,000 gain in November, about the same as October. The 56,000 gain reported by the Bureau of Labor Statistics (BLS) last month was, in our view, severely overstated, following a 12,000 drop in September. Similarly, the BLS figure for November will undoubtedly show no gain or a slight loss for manufacturing employment.

Since August, the APICS index component for employment has averaged 55.6, compared to 50.0 for production. This dichotomy may seem unusual; these indexes generally post similar values. Earlier this year, though, the average employment numbers were below those for production.

These data suggest that earlier in the year, firms had difficulty finding and attracting qualified employees. Even though output is now rising more slowly, they are still filling those positions. According to the APICS figures, shortfalls in employment occurred from March through July, with the situation being reversed in August through November. That suggests manufacturing employment will level off by year end.

• Manufacturing Production remains sluggish, with a gain of only 0.1 to 0.2 percent expected for November. The recent Federal Reserve Board production data have shown much larger gains, but they are apparently based on different seasonal factors. The APICS survey indicates that the average monthly gain in production has diminished from 0.4 percent from February to July to 0.2 percent per month since August.

• Unfilled Orders were virtually unchanged in November after falling an estimated 0.2 percent in October. New orders rebounded in November, whereas shipments did not; but order backlogs did not rise because the level of new orders, following the sharp dip in October, did not exceed the level of shipments.

• Inventory Stocks rose again in November, increasing an estimated 0.1 percent, down from the APICS survey results showing a 0.3 percent increase in October. With sales slipping an estimated 1 percent in November, this rise in inventories represents unanticipated, rather than planned increases in stocks.

• New Orders, excluding aircraft and defense, rebounded slightly in November, rising about 0.4 percent after plummeting the previous month. Our forecast of a 1.5 percent decline in October orders was greeted with some skepticism, but received validation from Commerce Department data showing a 4.2 percent drop in capital goods orders, excluding defense and aircraft. Total durable goods new orders, excluding defense and aircraft, according to Commerce, fell 1.4 percent in October.

  From August through November, the APICS survey indicates that new orders have fallen a total of almost 3 percent. This downtrend remains intact in spite of a slight improvement in new orders this month.

• The index for Production Planning slipped further in November, with the APICS survey now indicating no increase in manufacturing production over the next three months. That stagnation will be due in large part to the attempt to reduce unwanted inventory stocks.

• The reading of 42.7 for the actual-to-desired Inventory/Sales Ratio is actually up from a record low 33.8 in October, but still indicates that most firms continue to find their inventory stocks above desired levels. Most of the increase in this ratio has stemmed from the substantial reduction in shipments over the past two months, which has caused stocks to swell above desired levels. Hence, fairly sharp cutbacks in inventory investment should be expected in the months ahead.

It has become fashionable, as economists scramble to revise their 1998 forecasts down, to tie these changes on the collapse of the Southeast Asian economy. To the extent that this collapse was due in part to the overall strength of the dollar, there is some support to this reasoning; yet even if exports to Southeast Asia fall 20 percent from previously projected trend levels, that would knock only about .25 percent off the overall U.S. economic growth rate. So the slowdown shown in the recent APICS surveys must be due to other factors as well:

1. The stronger dollar will also reduce exports to those regions of the world where there have not been any financial crises. This includes Brazil, where a financial crisis was apparently averted by the use of contractionary fiscal and monetary policies.

2. Even before the collapse of most Southeast Asian currencies, slower growth rates in that region of the world pointed to global excess capacity in 1998 in many areas, especially high-tech. Hence, domestic investment in these areas would have grown at a slower rate even if the baht, rupiah, ringgit and won had not slipped at all. Admittedly, the trend to slower growth and excess capacity in that region of the world will have an additional impact in slowing down domestic investment next year.

3. Because of the emerging slowdown in production caused by weaker exports and capital spending, inventory stocks have once again accumulated to the levels where they are above desired levels. That will generate a short-term slowdown in production in the first half of 1998.

These signs of emerging weakness have now started to affect interest rates as well. At first this decline was widely attributed to a flight to quality syndrome that reflected the weakening stock market. That may have indeed been part of the reason that interest rates declined. However, when stock prices recovered, bond yields continued to decline as signs of weakness in the domestic economy became more visible.

If this scenario is accurate, it indicates very sluggish growth in the first half of 1998, perhaps in the 1.5 to 2 percent range. However, that will be followed by a recovery to the 3 to 3.5 percent range in the second half of the year. By then, the benefits of lower interest rates and the end of the inventory decumulation will offset sluggish growth in exports and capital spending.

The APICS Business Outlook Index was created and developed by Michael Evans of Northwestern University, in conjunction with APICS. The index consists of the following components, based on Evans' monthly survey of participating manufacturing firms:

•CURRENT CONDITIONS COMPONENT: Manufacturing shipments, employment, industrial production, inventory stocks

•FUTURE CONDITIONS COMPONENT: Future Component lagged 2 months. Durable goods new orders (excluding aircraft and defense), production plans, unfilled orders, ratio of actual-to-desired inventory/sales ratio APICS members and others from companies that might be potential participants in the APICS Business Outlook Index are urged to call Dr. Michael Evans at (847) 328-2468. APICS staff contact for the index is Barbara Gleason, APR, senior communications manager, APICS Headquarters, (703) 237-8344, ext. 2271. APICS Index Performance