By Michael K. Evans, Ph.D.

The current component of the index rose to 55.2 from 50.4, which means the most recent two-month average of 52.8 is almost the same as the average of 52.5 over the previous four months. The future component of the index rebounded to 53.5 from 44.6, but its two-month average of 49.0 is well below the previous four-month average of 53.4, indicating positive but slower growth in the fourth quarter.

Turning to the individual components, the biggest rebounds occurred in shipments and production, both of which recovered to approximately 60 in September from 40 in August. However, since these changes were related to the UPS strike, they do not indicate stronger growth in the upcoming quarter, although the September manufacturing figures should be strong.

By comparison, manufacturing employment grew at a slower rate in September, with that component of the index falling to 53.7 from 60.2. New orders rebounded only to 52.6, and production plans for the next three months continue to indicate modest gains. Hence the APICS index indicates a substantial drop in the growth rate of real gross domestic product from the revised 4.1 percent annual rate reported for the first half.


Current Conditions Component

• Manufacturing Shipments rebounded sharply in September, offsetting the big drop in August. The advance durable goods report from the Commerce Department indicated a 1.4 percent drop in shipments, in line with our survey results showing a 1 percent decline. The survey results indicate a 1.2 percent rebound in shipments this month. This fluctuation is presumably tied to the UPS strike and does not reflect the strength or weakness of the overall economy over the past two months.
• Manufacturing Employment was little changed in September, as opposed to the strong gains in August. Last month, the APICS survey indicated a 20,000 gain in manufacturing; the preliminary Bureau of Labor Statistics figures showed an even larger 47,000 gain, but about half of that increase reflected returning auto workers following a series of strikes. This month, with strike activity minimal, manufacturing employment should increase 5,000 to 10,000.
• Manufacturing Production also rebounded strongly in September, according to the APICS survey, but our figures disagree with the Fed numbers on production. Apparently different seasonal factors are being used. After falling 0.2 percent in August, the APICS survey indicates that production rebounded 0.6 percent in September. The Fed figures, on the other hand, showed a much more robust gain in August, although their preliminary figures have been heavily revised this year. We think production rose 0.4 percent in July, fell 0.2 percent in August, and rebounded 0.6 percent in September, for an average gain of 0.3 percent over the past three months. It is expected that, eventually, the revised Fed figures will show the same growth rate.
• Unfilled Orders posted another substantial gain in September, rising an estimated 0.4 percent. Last month, we estimated that order backlogs rose 0.6 percent; the advance durable goods report indicated an even stronger 1.1 percent increase. Some analysts have suggested that such big increases in order backlogs point to robust growth in the months ahead. Several months ago, though, we switched unfilled orders from the future component to the current component when a detailed analysis of the individual components indicated that unfilled orders moved more in line with current than future activity.
• Manufacturing Inventory Stocks, after rising sharply in August, fell an estimated 0.1 percent in September. The APICS survey results continue to show that except for months disrupted by strike activity, firms try to keep inventory stocks as lean as possible.

Future Conditions Components

• New Orders, excluding aircraft and defense, rebounded moderately after a fairly sharp decline in August. The Commerce Department figures for August were agnostic on this point: While total durable goods new orders reportedly rose 2.7 percent, new orders for nondefense capital goods, excluding aircraft and parts — which we and many other economists consider the key number — fell 5.4 percent after rising 6.6 percent in July. While that swing is clearly exaggerated, it is in line with the APICS results showing about a 1 percent gain in July followed by a 1 percent decline in August. For September, the survey indicates about a .5 percent increase in new orders, excluding aircraft and parts, in line with moderate but subdued growth for the fourth quarter.
• The index for Production Planning continues to show only moderate gains in the next three months. The September index rebounded to 51.6, the first time since June that it had risen above 50, but these figures are well below the second quarter average of 54.6. For the fourth quarter, the average gain in production is expected to slow to 0.2 percent per month.
• The index for the actual to desired Inventory/Sales (I/S) Ratio, which is reported on an inverted basis, rose to 53.5 in September from 44.6 in August; once again, the actual I/S ratio has declined relative to the desired level. The dip in August probably occurred because of the UPS strike, which caused some firms to accumulate unwanted inventories because goods could not be shipped. The September survey results indicate that firms are back to keeping inventory stocks unusually lean.

Yet another soft landing "on schedule"
While 4+ percent growth does wonders for boosting profits and employment, it nonetheless raises concerns about whether the economy will overheat, which could cause the Fed to tighten and eventually bring the expansion to a halt. In fact, such fears are overblown; the so-called Phillips curve is finally receiving a well-deserved burial. Nonetheless, a slowdown in the growth rate to about 2.5 percent in the second half of the year will dampen those pressures in financial markets and reduce long-term interest rates, hence setting the stage for yet another year of robust growth in 1998.

In terms of the APICS survey, the key factor pointing to slower growth in the second half has been the sharp decline in the index of production planning, which averaged 48.3 in the third quarter, compared to 54.6 in the second quarter. That is a substantially larger drop than the comparable figures for new orders, which fell only slightly to 50.6 this quarter from 51.9 last quarter. There has been little change in the actual to desired I/S ratio; except for the UPS strike, these figures have indicated a declining I/S ratio in every month since February.

In terms of the major economic sectors, the September APICS report shows that new orders and production planning are strongest for consumer goods, mixed for machinery and weakest for the construction sector. The drop in orders and planned production for construction-related industries reflects the rise in interest rates that occurred earlier this year, and the decline in housing starts over the past two months. That sector is expected to remain weak for the rest of this year.

The outlook for the machinery sector is mixed, with industrial machinery likely to show sluggish gains for the rest of the year. Capacity utilization remains well below the rates that have previously been associated with full employment, and export markets are weakening because of the stronger dollar.

On the other hand, consumer spending remains robust, a result of full employment and fatter paychecks. Although the growth in employment is slowing down, that reflects a shortage of qualified labor as much as it does more moderate growth. Overtime, bonuses, profit-sharing and other increases that are not tied to the base wage rate continue to keep consumption moving ahead.

Thus, based on the APICS survey results, the slower growth in the second half is tied primarily to sluggishness in construction, industrial machinery, exports and smaller increases in inventory investment, whereas consumer spending will remain robust at least through the end of the year.

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

APICS Business Outlook Index

Maximum feasible value = 100
CURRENT COMPONENT
	SHIPMENTS	EMPLOYMENT	PRODUCTION	INVENTORY	UNFILLED ORDERS	CURRENT COMPONENT
1996
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
SEP	59.8	53.7	60.6	47.5	54.4	55.2

FUTURE COMPONENT
	NEW ORDERS	PRODUCTION PLANNING	I/S RATIO	FUTURE COMPONENT	TOTAL APICS INDEX*
1996
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
SEP	52.6	51.6	56.3	53.5	54.3
* Current and Future Components with equal weights

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