By Michael K. Evans, Ph.D.

These are the possible reasons why the index fell so much in August: the UPS strike, seasonal factors associated with summer shutdowns and a longer-term weakening in the economy.

If the UPS strike were the main reason for the decline in the index, we would expect to find a substantial drop in shipments, little change in production and a big buildup in inventories. The shipments component of the index did indeed fall to 39.6 from 57.3, while the inventory component rose to 54.6 from 41.2. However, the production component also plunged to 41.9 from 54.9. So while the UPS strike clearly had some impact on the figures, it was not the only factor causing a decline in the APICS index.

The second possibility is that the July figures were stronger than average, and the August figures weaker than average, because summer shutdowns were shorter and less severe than usual this year. To a certain extent, the same phenomenon occurred last year: The APICS index rose to 53.0 in July, fell to 46.4 in August, and rebounded to 53.8 in September. This pattern was also reflected in many of the government statistics, especially new orders, which showed a big gain in July, a large dip in August, and a substantial recovery in September.

A year ago, though, while the index components for shipments, new orders, and production dropped in August, production planning remained strong. That did not happen this year; the index for production planning peaked at 60.0 in June, but then fell to 48.5 in July and declined further to 44.8 in August. As a result, slower growth has reappeared on the horizon.

To summarize the August report, we find that (a) some of the dip in the August index was due to the UPS strike, (b) some was caused by briefer summer shutdowns, but (c) some of it also indicates slower growth for the rest of the year. As a result, real growth in the second half of 1997 is now expected to average 2.5 to 3 percent compared to 4 percent growth in the first half.


Current Conditions Components
•Manufacturing Shipments plunged to 39.6 from 57.3 in August, indicating a decline of about 1 percent for the month. We estimate that most, although not all, of this reduction was due to the UPS strike. Last month, the index predicted a 0.7 percent gain in shipments; the advance Census report showed a 1.7 percent increase for durable goods.

•Manufacturing Employment continued its robust gains in August, indicating that manufacturers did not adjust their hiring practices to the slowdown in shipments, production and orders that occurred during the month. Several factors may be at work here. First, as it becomes increasingly difficult to find qualified employees, some firms hired more recent graduates than usual; that would have been reflected in the July figures, too. Second, firms may still be trying to add new employees to reduce their excessive overtime hours. Third, while employment is usually considered a coincident indicator, recent evidence increasingly suggests it lags output by up to three months. Hence the further robust gains in August may reflect strong gains in production earlier in the year. In any case, the APICS survey calls for a gain of about 20,000 in August manufacturing employment.

•On the other hand, Manufacturing Production fell slightly in August, according to the APICS survey. Last month, the survey predicted a gain of 0.3 to 0.4 percent; the preliminary Fed data showed a gain of only 0.1 percent, but those figures have been heavily revised in recent months. On the other hand, it is also possible that the revised Fed seasonals may incorporate the recent trend toward fewer plant shutdowns in July, in which case the August figure reported by the Fed could rebound. In our view, though, the UPS strike also had a negative impact on production as well as shipments in August.

•Unfilled Orders rose sharply in August, with the index rebounding to 55.7, approaching its historical peak level of 56.3. That is certainly not surprising considering the substantial drop in shipments. Yet the increase would have been even larger if not for the substantial drop in new orders this month. This index figure is equivalent to a 0.6 percent rise in unfilled orders.

•Manufacturing Inventory Stocks rose sharply in August, in line with the general scenario that the UPS strike reduced shipments more than production. Yet the concomitant drop in production meant the rise in stocks was more modest than might have been expected from the decline in shipments. Apparently, some firms also cut production when they found that their shipments would be delayed; others may have been forced to curtail production when required parts did not arrive in a timely fashion.


Future Conditions Components
•Durable Goods New Orders, excluding aircraft and defense, fell almost 1 percent in August, according to the survey results. Last month, the survey indicated a gain of 0.5 percent. Total durable goods new orders fell 0.6 percent in July, according to the advance government report, but the gain in orders, excluding aircraft and defense — the category measured here — was indeed 0.5 percent.

We are a bit wary about putting too much emphasis on this one-month drop in orders. A year ago, the index component for new orders fell from 55.0 in July to 43.5 in August, but then rebounded to 56.9 in September. That was not just a fluke in the survey results; the comparable government figures showed a 2.4 percent rise in orders in July, followed by a 1.9 percent drop in August and a substantial rebound in September. In our view, that pattern clearly reflects the switch in summer production and ordering plans. However, when taken in tandem with the drop in production planning, the weakness in new orders could also be flashing an early warning signal.

•The index for Production Planning fell for the second month in a row, declining from 60.0 in June to 48.5 in July and 44.8 in August. That figure indicates an average decline of 0.1 percent in production over the next three months. Such a decline during a period of overall economic growth would not be unprecedented; in recent years it has happened in 1991.4, 1993.2, 1995.1, 1995.2 and 1995.4 (all these figures are monthly averages). Hence, such a finding, even if it turned out to be strictly correct, in no way implies a recession in the future. However, it does point to substantially slower growth in the economy for the rest of this year than occurred in the first half.

•The actual-to-desired Inventory/Sales Ratio edged up slightly in August; since this is an inverted series, the index component fell from 56.2 to 46.2. Actually this is not a very big drop considering the decline in shipments and buildup in inventories caused by the UPS strike. It indicates that firms are indeed maintaining their efforts to keep inventory stocks near rock-bottom levels in periods that are not disrupted by strikes.


Slower growth not necessarily a negative development
Several recent developments in the economy lend corroboration to the APICS results that real growth will diminish in the second half, including the following:

•The rise in interest rates this spring has caused housing starts to flatten out and has dampened sales of household durables.

•Although the June trade statistics were strong, it is becoming increasingly likely that the 25 percent increase in the value of the dollar over the past two years will put a dent in export growth in the coming months.

•Worldwide excess capacity and falling commodity prices are likely to lead to only modest gains in expansion of industrial capacity.

Nonetheless, a reduction in the growth rate from 4 percent in the first half to 3 percent or even 2.5 percent in the second half of the year is not necessarily a negative development. The unemployment rate is below 5 percent and will remain there as long as growth remains positive. Even more important, to the extent that the growth rate does moderate, the chances of further monetary tightening and higher interest rates are reduced virtually to zero, hence improving the likelihood that the current recovery will be prolonged.

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

Maximum feasible value = 100
CURRENT COMPONENT
	SHIPMENTS	EMPLOYMENT	PRODUCTION	INVENTORY	UNFILLED ORDERS	CURRENT COMPONENT
1996
SEP	63.3	43.3	56.0	51.8	51.7	53.6
OCT	53.0	45.2	50.2	42.4	45.7	47.7
NOV	46.7	43.7	52.1	50.8	46.6	48.3
DEC	59.5	54.5	50.0	41.0	49.7	51.2
1997
JAN	38.5	51.4	43.8	37.2	40.5	42.3
FEB	47.5	56.1	53.2	39.7	47.4	48.8
MAR	47.5	48.9	53.2	46.1	56.3	50.4
APR	61.1	54.4	57.1	44.1	47.8	52.9
MAY	54.4	56.9	56.3	47.5	48.8	52.8
JUN	45.2	54.1	60.6	47.2	52.6	51.9
JUL	57.3	59.8	54.9	41.2	48.7	25.4
AUG	39.6	60.2	41.9	54.6	55.7	50.4

FUTURE COMPONENT
	NEW ORDERS	PRODUCTION PLANNING	I/S RATIO	FUTURE COMPONENT	TOTAL APICS INDEX*
1996
SEP	56.9	54.0	53.6	54.0	53.8
OCT	50.5	55.1	51.1	50.6	49.1
NOV	41.9	49.3	43.3	45.3	46.8
DEC	55.3	47.5	57.1	52.4	51.8
1997
JAN	41.7	56.5	50.7	49.6	45.9
FEB	43.6	48.4	48.8	46.9	47.8
MAR	49.3	56.5	50.0	51.9	51.1
APR	52.9	50.0	59.1	54.0	53.4
MAY	55.6	53.9	50.0	53.2	53.0
JUN	47.2	60.0	51.4	52.9	52.4
JUL	56.4	48.5	56.2	53.7	53.0
AUG	42.9	44.8	46.2	44.6	47.5
* Current and Future Components with equal weights

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