Business Outlook Index
Manufacturing Activity Tumbles Again
By Michael K. Evans
The APICS Index continued its recent decline in December, falling to 43.8
from 44.8 in November. Most of the decline occurred in the Future Component
Index, which fell to 43.8 from 48.3. By comparison, the Current Component
Index rose to 43.8 from 41.3, mainly because of increases in the figures
for employment and production, although those still indicate an overall
decline in manufacturing activity in December. Coincidentally, both the
current and future components turned out to be the same number this month.
The pattern shown by the survey is that the sharp drop in employment and
production in November moderated somewhat in December. Taking into consideration
the inventory figures, it appears that the sharp reduction in inventory
stocks in October and November had just about come to an end in December.
Firms no longer report they are planning to reduce their inventory/sales
ratios further over the next few months.
The most negative finding in the December survey in terms of overall economic
activity is the sharp decline in new orders, the second consecutive month
that has occurred. The index figure for new orders averaged 52.6 for the
July-October period, but declined to 45.3 in November and 37.1 in December.
Current Conditions Component
Manufacturing Shipments, after rising every month since April, fell
almost 1 percent in December. We think this reflects an attempt by the retail
sector to reduce its inventories.
Manufacturing Employment fell again in December, although not as much
as November. Last month, the APICS survey estimated a 50,000 decline; the
Bureau of Labor Statistics figures showed only a 32,000 decline, which will
probably be revised down. The December drop is estimated to be about 15,000.
The survey results were somewhat unusual in terms of the relatively large
number of respondents showing no change in employment in December. The percentage
of firms reporting higher employment was quite anemic in both November and
December, but of the remaining firms, almost 40 percent showed no change
in December, whereas in November, most of those firms reported lower employment.
Manufacturing Production declined again in December, but only by 0.2
percent, not as much as in November, according to the APICS survey. The
Federal Reserve Board figures showed a 0.2 percent gain in manufacturing
production for November, whereas the survey figure had anticipated about
a 0.5 percent decline. However, it is likely that the November figure will
be revised down-just as the September figure was eventually revised up from
0.2 to 0.6 percent, which was the number originally predicted here.
Another point to be considered is that the Fed index of manufacturing production
often dips sharply in December during years in which motor vehicle sales
have been weak, the result of unusually long shutdowns for the holidays.
This occurred in both 1990 and 1991. As a result, the December Fed index
could post a decline of as much as 0.5 percent because of this one factor;
it depends on how much the November figure is revised. Eventually, we think
the APICS prediction of an average decline of 0.25 percent in production
in November and December will be mirrored in the Fed statistics.
Manufacturing Inventory Stocks declined slightly in December, but not
as much as in November, according to the survey, as the bulk of the attempt
to reduce stocks took place in October and November. Admittedly, these figures
do not agree with the Census estimate of a 0.4 percent rise in manufacturing
inventory stocks in October, a figure which seems high because it occurred
in the same month that production fell 0.2 percent. Since manufacturing
firms have reduced their stocks to desired levels, they will not be cutting
further unless sales and orders turn out to fall below current expectations.
Future Conditions Component
New Orders, excluding transportation equipment, plunged about 1.5
percent in December, according to the APICS survey. The survey indicated
a 0.8 percent drop in November.
Orders slumped in three of the four major categories we track: capital goods,
consumer goods and construction materials. Only electronics posted a gain.
Less than a quarter of the participants reported any increase in new orders
for December.
The relatively upbeat reading for Production Planning in November was
not repeated in December, with a decline in that component of the index
to 50.0, indicating little change in industrial production over the next
three months. The reduced optimism of manufacturers was due in part to the
sharp decline in new orders in December.
The index for the ratio of the actual to desired Inventory/Sales ratio
fell to 42.6 in December from 53.1 in November. This is an inverse index,
which means a decreasing proportion of firms are planning to add to inventory
stocks in the near future. By comparison, in October and November, more
firms reported they might be adding to stocks over the next few months.
The decline in orders and shipments in December probably negated some of
these plans.
Last month, 63 percent of the firms reported their inventory stocks were
above desired levels. That figure remained at 63 percent in December. However,
the actual numbers showed an increase in the inventory/sales ratio in December,
reflecting the sharp decline in shipments. As a result, few firms will be
boosting inventory stocks in early 1996.
Few Signs of 1996 Recovery
Since April, manufacturing employee-hours have declined at an annual rate
of 4 percent, while production has risen at a 1 percent annual rate, implying
that productivity has increased at a 5 percent rate. The odds that productivity
would grow at near-record rates during a time of flat to declining economic
activity are close to zero.
Years of experience have taught us that numbers of that sort are invariably
revised down to show productivity growth of about 3 percent. Either the
drop in employee-hours is understated or the rise in production is overstated.
The APICS survey does not contain data for the length of the workweek, but
since April, employment has fallen an average of 32,000 per month. That
figure is slightly higher than, but basically in agreement with, the APICS
data. However, the APICS survey shows that industrial production has been
flat, so the Federal Reserve figures may overstate the growth in manufacturing.
Based on other data, we think production has not risen since April. How
does that compare with the 2 percent growth rate estimated by Bureau of
Economic Analysis ?
Zero growth in manufacturing would be roughly in line with about a $15 billion
rise in purchases of consumer goods, a $15 billion rise in producer durable
equipment, a $20 billion decline in inventory investment, a $5 billion drop
in net exports (mostly before midyear; they have improved since then), and
a $5 billion decline in defense purchases of goods.
If the economy has risen at a 2 percent annual rate, that implies about
a $80 billion increase at annual rates over the past three quarters. Of
that, $50 billion has occurred in consumer services and about $20 billion
in construction, with a $10 billion discrepancy.
The figures presented in the current APICS survey suggest no improvement
in the manufacturing sector over the near term. The construction sector
will be hard-pressed to keep up its recent gains in view of the three consecutive
monthly declines in housing starts, plus a weather-related gain in October.
That would appear to put real growth closer to 1.5 percent than 2 percent
for the first half of 1996, but there are a few positive factors that could
account for the half-percent. The recent cut in the Federal funds rate,
plus a likely cut in January, could boost interest-sensitive sectors of
the economy. It is likely that most of the December figures do not reflect
the recent rate cut, since few, if any, orders are placed in the last 10
days of December.
Also, the acceleration in export growth could continue, since there is usually
a full year lag between changes in the value of the dollar and the peak
impact on net exports.
The latest figures, then, indicate that manufacturing activity remains flat.
That indicates a 1.5 to 2 percent rate of growth in the overall economy,
depending primarily on how much activity responds to the recent decline
in interest rates.
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Index performance over the last 12 months.
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and Future Component data compiled over the last 12 months or click
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opinions expressed in this report represent the viewpoints of Evans Economics,
Inc., and are not necessarily those of APICS.
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