APICS - TPA - February 1998 - Business Outlook Index

February 1998 • Volume 8 • Number 2

Outlook Unchanged:
Slower Growth Ahead

By Michael K. Evans, Ph.D.

For the third month in a row, the APICS Business Outlook Index remained slightly below 50. The December level of 48.6 was virtually unchanged from 48.2 in November. The Current Component edged up to 50.1 from 49.0, while the Future Component slipped slightly to 46.1 from 46.7.

The index for employment fell from 54.9 to 51.7, the lowest value since March. That suggests the unusually large gains in manufacturing employment have come to an end.

Shipments fell less in December than in November, as the index rebounded to 48.6 from 40.7; however, that figure still suggests no gain. New orders tumbled in December, falling to 42.2 from 52.6. Since new orders fell more than shipments, backlogs of orders also declined, with that component falling to 44.3 from 47.6.

Manufacturing inventory stocks continue to grow moderately, rising to 55.9 from 53.7. The desired-to-actual inventory/sales ratio was 50.0 for December, indicating that firms currently find inventory stocks in balance with expected level of sales.

For the past five months, the Future Component has consistently been below the Current Component, pointing to more sluggish growth in the coming months. In our view, the APICS index clearly points to below-average growth for the first few months of 1998.

Current Conditions Component

Manufacturing Shipments were virtually unchanged in December, according to the APICS survey. In November, the preliminary Commerce Department figures showed a 0.4 percent drop in durable goods shipments, compared to the 1 percent estimated by the survey.

Manufacturing Employment posted only a modest gain in December, rising 5,000 to 10,000. In previous months, the APICS index showed more robust gains, but these were surpassed by the increases reported by the Bureau of Labor Statistics (BLS). Nonetheless, the APICS survey did indicate above-average gains in employment from April through November, consistent with the BLS figures over that same period.

The December data indicate that most of the catch-up in hiring has now been completed. When coupled with the expected slow-down in manufacturing activity, manufacturing employment will probably show little or no gain in early 1998.

Manufacturing Production remained sluggish, rising 0.2 percent for the third month in a row, according to the APICS survey. For the first half of this year, the APICS figures indicated an average gain of 0.4 percent per month, compared to the same average gain reported by the Federal Reserve Board (FRB) (with revised data). However, there has been a marked dichotomy in the second half of the year, with the APICS data indicating only a 0.2 percent average monthly gain, compared to a whopping 0.6 percent increase indicated by the FRB data.

We think the FRB data will eventually be revised down. Until that happens, though, the big gains reported for the second half of 1997 are likely to be offset by unusually small gains, or actual declines, in the first half of 1998.

Unfilled Orders fell again in December, as new orders plunged while shipments were virtually unchanged. Order backlogs declined an estimated 0.2 percent this month; this figure also excludes aircraft and defense.

Inventory Stocks rose 0.3 percent in December, compared to 0.4 percent in October and an estimated 0.2 percent in November. In spite of the slowdown in sales, firms are continuing to boost their inventories.

Future Conditions Components

New Orders, excluding aircraft and defense, fell an estimated 1 percent in December. Last month, the overall orders figures were distorted by a huge increase in aircraft orders; that sector is not included in our survey results. That gain boosted the rise in new orders up to 4.8 percent; but excluding aircraft, orders fell 0.5 percent, whereas the APICS survey had indicated a slight 0.4 percent rise for November.

For the fourth quarter, the new orders component of the APICS index averaged 43.9, indicating an average decline of about 0.5 percent per month in new orders, excluding aircraft and defense. That compares to an average drop of 1.0 percent in this category of orders reported by the Commerce Department for October and November. Both these series clearly point to weakness in shipments and production in early 1998.

The index for Production Planning indicates no gain in production for the first quarter of 1998. After predicting robust gains earlier in the year, this series also predicted no gain in the fourth quarter, yet the FRB data continue to report above-average gains. As noted above, we think this situation will be reversed in early 1998.

Usually when sales are flat or declining and inventory stocks are rising, the actual-to-desired Inventory/Sales Ratio also rises (which has a negative impact on future production plans). In December, though, firms reported that the actual I/S ratio was right in line with desired values. Approximately 15 percent of the firms reported a rise in their desired I/S ratio in December, an unusually high proportion.

This increase could be attributed to several factors, including the transportation snafus caused by Union Pacific, a slightly higher desired I/S ratio because of lower interest rates, or an attempt to service clients more quickly and efficiently next year. However, we do not expect the desired I/S ratio to keep rising in early 1998.

What Happened to the Slowdown?
Recently the monthly manufacturing conditions surveys, including APICS, NAPM and the various regional Federal Reserve banks, have come under fire by some who claim the slowdown indicated by these surveys is not showing up in the gross domestic product (GDP) statistics. The implication is there really is no slowdown at all.

This is essentially the same comment that was leveled in reverse at many of the same surveys back in 1991 (the APICS survey started in late 1993). The substantial jump in activity reported by those surveys never showed up in GDP, even though manufacturing production rose at a 7.8 percent annual rate in 1991.3. Yet the recovery did not materialize, and the economy almost fell back into recession again before Fed easing rescued the day.

In this case, though, we think the evidence is overwhelming that the economy really is slowing down, and it will be reflected in the government data starting next quarter. There are several reasons that support this hypothesis:

Orders for net exports have already fallen sharply, but the actual goods being loaded and unloaded at the docks represent commitments that were made several months ago. Once actual shipments reflect the Asian crisis, exports will drop and imports will zoom.

Inventory stocks are drifting up, but sales are not. In our view that is strictly a temporary development, and will be reversed in early 1998 because of the weakness in consumer spending, exports and high-tech investment. It is also possible that the railroad transportation delays have temporarily boosted inventory stocks.

Until December, manufacturing employment gains had been unusually large because firms were filling positions that had remained vacant due to the difficulty of obtaining qualified workers. Because the preliminary production figures are based primarily on employment data, they have recently been overstated.

Partial fourth quarter data indicate real GDP is likely to rise 4 to 5 percent. That would be well above the figures indicated by the APICS survey during the quarter. However, we think those gains are due to (a) a lag in the net export data behind reality, and (b) temporary increases in inventory investment caused largely by exogenous developments. Thus growth in the first half of 1998 should be well below average. Hence our outlook for an increase in real GDP of 1.5 to 2 percent in the first half of the year seems even likelier now that growth last quarter has been artificially expanded.

All opinions expressed in this report represent the viewpoints of the Evans Group and are not necessarily those of APICS.

APICS Index Performance

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

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

OCT
44.0
53.5
48.8
62.1
44.7
50.6

NOV
40.7
54.9
48.5
53.7
47.6
49.0

DEC
48.6
51.7
50.0
55.9
44.3
50.1

FUTURE COMPONENT

NEW ORDERS

PRODUCTION PLANNING

I/S RATIO

FUTURE COMPONENT

TOTAL APICS INDEX*

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

OCT
36.9
47.9
33.8
39.5
45.1

NOV
52.6
44.8
42.7
46.7
48.2

DEC
42.2
46.0
50.0
46.1
48.6

* Current and Future Components with equal weights

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