March 1996 € Volume 6 € No. 3

Business Outlook Index

Signs of Strength Start To Re-emerge

By Michael K. Evans


Both the current and future components of the APICS Business Outlook Index improved this month. The bigger gain occurred in the future component, which
rose to 51.3 from 43.8.

We have changed the format of the graph to show (a) the current component and (b) the future component with a lag of two months. Thus, for example, the future component for January indicates approximately where the manufacturing sector ought to be in March. Based on previous relationships, the current component of the APICS index should move back above 50 by March.

In January, the current component rose to 47.4 from 43.8. That means activity will be increasing, but just barely; a reading of 46 means activity is flat.

The biggest contributor to the gain in the future component was the sharp rise in the component measuring the ratio of the actual to desired inventory/sales (I/S) ratio. Most firms have now reduced inventory stocks to the point where they are at a favorable level relative to desired stocks. That should clear the way for increased production in the relatively near future.

In the current component of the index, employment remains weak with another 30,000 decline in manufacturing employment expected for January. As noted above, inventory stocks are also very low. However, production and shipments improved this month and do not seem to have been unduly hampered by the severe winter weather.


Current Conditions Component
  • Manufacturing Shipments appear to have bounced back in January after declining in December. Because of the government shutdown, no comparable data are available from the Commerce Department.

  • Manufacturing Employment, on the other hand, did not bounce back, and probably fell another 30,000 in January. Last month the survey indicated that manufacturing employment would decline about 15,000, excluding the return of striking workers in the transportation equipment sector; the number on that basis showed an 11,000 gain, the first uptick since March 1995. However, the diffusion index issued by the Bureau of Labor Statistics did not support that gain, so we think it is a year-end seasonal fluke rather than the beginning of a turnaround in manufacturing employment.

  • Manufacturing Production rose about 0.2 percent in January after being flat in December (excluding returning strikers), according to the survey results. We had expected the blizzards in the Northeast and the Midwest to have a bigger impact on the figures, but they were not readily apparent. These results would suggest that the main impact of the blizzard was on retail sales rather than production.

  • Manufacturing Inventory Stocks continued to decline in January and are now at historically low levels; hence, they should no longer be a drag on production in the next few months.


    Future Conditions Component
  • New Orders, excluding transportation equipment, recovered in January after plunging in December; again, no comparable government data are available. The reading of 48.2 indicates essentially no change in new orders for January. However, the drop in orders from declining inventory investment seems to have ended.

  • Unfilled Orders continued to decline in January and were the weakest of the four parts of the future component. While new orders recovered somewhat in January, firms are still not anxious to increase backlogs, and with delivery times down, firms are generally under more pressure to deliver quickly.

  • The comeback in Production Planning, which began in November, continued in January, although at a subdued pace. Nonetheless, the survey results have indicated an eventual pickup in production for each of the past three months, and we think the data for January will start to reflect this development.

  • The biggest gain-and the highest level-of any of the components of the APICS index occurred in the ratio of the actual to desired I/S Ratio. Inventories are now well under control, and the combination of low stocks and reasonable gains in shipments in January will probably lead to further gains in production over the next few months.


    Manufacturing see-saw: next move up?
    In spite of the economy remaining at full employment last year, 1995 was a weak year for manufacturing. From December 1994 through December 1995, production rose only 0.8 percent. However, this bland number masked several sharp turns and twists. In particular, production fell 0.4 percent through July, then rose 1.3 percent over the next two months, and then flattened out again in the last quarter of the year. That pattern is also reflected in the current component of the APICS index. Thus, what looked like the beginning of a recovery in the summer quickly pancaked again in the fall. So which is it to be in 1996?

    January is "off limits" in that we don't know how much the blizzards caused production cutbacks. However, our survey results indicate that the bad weather probably did not have a big impact, and production improved slightly this month. Furthermore, production should rise to an average of about 0.3 percent per month once the weather returns to normal.

    The general impression we have, based on the survey results and other information, is that domestic capital spending, excluding high tech, remains weak at the moment, but exports are taking up much of the slack.

    Although the survey does not specifically ask about exports, it has invariably been the case that export growth reaches its peak about one year after the value of the dollar declines. Thus, orders and shipments of exports, especially capital goods, should accelerate further in the first half of 1996.

    The major swing factor to date, however, has been inventories. In this regard, the survey results show that inventory stocks dropped sharply late last year, and the I/S ratios have now reached unusually low levels.

    It is difficult to pinpoint precisely why production spurted ahead in the summer and then leveled off again in the fall. However, the most likely explanation is that the strong gains in retail sales in May and June caused retailers to boost their orders during the summer, hence raising production. However, the gain in sales did not continue into the fall, leaving firms with excess inventories. As soon as they realized this, orders and production were cut back.

    Even if sales were to remain flat, there would probably be some improvement in production over the next few months because inventory investment will level off instead of declining further. If the gains in retail sales during the last week of December and thus far into January continue for a few more weeks, production would then receive an additional boost for that reason. At the moment, however, the survey results indicate an improvement based primarily on the inventory factor.

    The expected gains in production do not carry over into employment, though. The survey results indicate another 30,000 decline in manufacturing employment in January. Firms are being cautious about hiring more workers, for they aren't sure how much longer the modest gains in production will continue. Also, in spite of the economy being at full employment, the labor shortages that have been reported have generally not occurred in the manufacturing sector. So at least in the employment data, no upturn is yet under way.

    With the drop in capacity utilization to 82.8 percent in December, down from its recent peak of 85.1 percent at the beginning of 1995, the Fed has less reason to believe that bottlenecks and shortages are about to occur. Furthermore, total capacity is now rising at an annual rate of 4 percent, so even an average monthly gain of 0.3 percent in industrial production would result in a further decline in the utilization rate this year. With this statistic-and with the additional capacity coming on stream-there is virtually no chance of any inventory buildup in 1996 from perceived shortages or price increases.

    The gain in industrial production of 7.6 percent during 1994 was excessive relative to total demand, while the gain of only 0.8 percent in 1995 was deficient. Now that inventory stocks have returned to equilibrium levels, the growth in production this year ought to be closely tied to the overall economic gain of 2.5 to 3 percent, at least for the first three quarters.
    All opinions expressed in this report represent the viewpoints of Evans Economics, Inc., and are not necessarily those of APICS.

    APICS Index Performance Graph

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    APICS Business Outlook Index



    Maximum feasible value = 100
    CURRENT COMPONENT
     SHIPMENTS EMPLOYMENT PRODUCTION INVENTORY CURRENT COMPONENT TOTAL APICS INDEX*
    1995
    FEB 55.3 50.7 50.0 53.7 52.4 49.1
    MAR 44.3 56.0 52.1 57.1 52.4 48.9
    APR 45.7 44.4 49.2 55.7 48.8 46.3
    MAY 58.6 42.4 52.1 47.2 50.1 48.1
    JUN 53.1 46.8 41.7 35.9 44.4 46.5
    JUL 54.7 46.6 45.8 45.3 48.1 50.3
    AUG 62.8 44.8 44.2 37.9 47.4 49.1
    SEP 56.9 48.6 58.5 54.8 54.7 50.1
    OCT 57.1 42.8 46.6 46.0 48.1 49.5
    NOV 56.6 34.6 38.9 35.3 41.3 44.8
    DEC 43.4 43.3 44.4 44.1 43.8 43.8
    1996
    JAN 59.7 42.1 50.0 37.9 47.4 49.4





    FUTURE COMPONENT
     NEW ORDERS UNFILLED ORDERS PRODUCTION PLANNING I/S RATIO FUTURE COMPONENT
    1995
    FEB 45.8 37.8 46.9 52.8 45.8
    MAR 48.5 42.6 48.3 42.6 45.5
    APR 45.5 39.4 44.4 45.7 43.8
    MAY 42.8 42.6 43.5 55.6 46.1
    JUN 41.7 33.3 68.0 51.6 48.6
    JUL 60.0 53.2 50.0 46.9 52.5
    AUG 47.0 46.9 57.7 51.0 50.7
    SEP 51.5 44.6 43.3 43.1 45.6
    OCT 51.9 48.0 48.3 55.7 51.0
    NOV 45.3 39.6 55.4 53.1 48.3
    DEC 37.1 45.5 50.0 42.6 43.8
    1996
    JAN 48.2 43.1 52.1 61.7 51.3
    * Current and Future Components with equal weights

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