APICS - TPA - April 1998 - APICS Business Outlook Index

April 1998 • Volume 8 • Number 4

APICS Business Outlook Index:

Effect of Asian "Crisis" Wanes

By Michael K. Evans, Ph.D.

The APICS Business Outlook Index rebounded in February to 48.4 from 46.8. The gain was caused by a substantial rise in the Future Component, which improved to 47.9 from 41.9. The Current Component slipped to 48.8 from 51.8.

The overall index still indicates below-average growth in the manufacturing sector for February. However, the improvement in the Future Component, notably the rebound in new orders, suggests the decline associated with the Southeast Asian crisis has been shorter and milder than originally anticipated. For the first time since September, the production planning index has moved back to 50.

The only two weak areas identified by the APICS survey this month are employment and actual-to-desired inventory stocks. The survey results indicate that the rapid employment gains in the manufacturing sector came to an end in February, as firms finally managed to fill long-vacant positions.

The actual inventory/sales (I/S) ratio remains well above its desired level in spite of a rebound in shipments in February; this is attributed to continuing logistics problems in the transportation industry. The actual I/S ratio has been at or above desired levels since September.

Thus, the APICS index does not indicate above-average growth in the months ahead. On the other hand, the survey also shows that the long-anticipated slowdown caused by declining exports is unlikely to materialize in the near future. The overall growth rate should remain near average levels.

Current Conditions Components

Manufacturing Shipments rose about 0.5 percent in February, according to the APICS index, the largest gain since September. Because of the short month, comparisons of January figures with the Commerce Department data are not available.

After surging an average of 41,000 per month over the past four months, the gain in Manufacturing Employment came to an abrupt halt in February, according to the APICS index. The survey indicates that manufacturing employment declined about 10,000 in February.

This decline can be attributed to several factors. First, employment generally lags behind orders and shipments, which started to weaken as early as August. Second, while the probable effects of the Southeast Asian crisis have been exaggerated, there have been some cutbacks in the high-tech sector which should be reflected in the February employment figures. Third, sluggish car sales and declining employment in aircraft probably reduced employment in the transportation industry. Fourth, many firms have finally filled long-vacant positions; catch-up hiring has been completed.

Manufacturing Production rose an estimated 0.2 percent in February. Last month, the APICS survey called for a 0.3 percent gain, the same as the preliminary Fed data.

Durable Goods Unfilled Orders were unchanged in February, according to the survey. Last month, the APICS data indicated a 0.1 percent drop in unfilled orders. This is the first time since September that backlogs have not declined.

Inventory Stocks edged higher again in February, rising about 0.2 percent. According to the survey, this is the fifth consecutive month that inventory stocks have risen. However, the rise in stocks should soon come to an end.

Future Condition Components

Durable Goods New Orders, excluding transportation, rose an estimated 0.7 percent in February, suggesting that the worst of the impact due to the Asian-related slowdown has passed.

The index for Production Planning for February is very close to 50, indicating gains of 0.3 percent per month in production for the next three months. This is the first time since September that component of the index has indicated average or better growth in the months ahead.

The actual to desired Inventory/Sales (I/S) ratio still remains well above average; since a high I/S ratio usually indicates decreasing production in the near future, this series is inverted in the APICS index. The actual I/S ratio was below desired levels for the first three quarters of 1997, but has been higher than desired since September. The relatively high ratio is due to: a) slower growth in manufacturing; and b) excess inventories lost somewhere in the transportation system. It now appears this latter problem will not be solved for several more months.

Signs of 1998 Slowdown Recede
It didn't take the economists long to react to the Southeast Asian crisis. The forecast for 1998 real growth, which had already been set 1 percent below the 1997 gain of 3.8 percent, was sliced another 0.7 percent, bringing it down to 2.1 percent for 1998 — which is still the latest consensus forecast.

However, that knee-jerk response may have been an overreaction for two reasons. First, forecasts of slower growth in 1998 failed to take into account the expansionary impact of the drop in bond yields last year. Second, the impact of slower growth in Southeast Asia, plus the negative impact from the general strengthening of the dollar, were overstated.

We're not intimating that the trade deficit won't balloon this year. However, that negative impact on the gross domestic product (GDP) will be offset by strength in domestic consumption and fixed investment.

As early as August, the APICS survey identified a slowdown in manufacturing shipments and orders that did indeed materialize. However, this slowdown did not extend to production, employment or total GDP. Consumer spending remained strong, buttressed by unusually large gains in real wages and the drop in bond yields. Also, inventory investment rose sharply, partly because of the gains in shipments and orders earlier in the year, and partly because of snafus in the transportation system. Even though export orders declined, shipments of exports remained strong because of orders that had been placed earlier in the year.

New orders for exports fell to a lower level and have not recovered. However, domestic new orders also weakened briefly because of the widespread concern that domestic growth would be hurt by the drop in exports. Gradually, it has become clear this is not the case. Not only have domestic sales remained strong, but the boom in the stock market and consumer confidence seems to suggest that rumors of a slowdown in the U.S. economy were greatly exaggerated.

Consumer spending has remained strong because of the big gains in real wages and lower interest rates. This strength in the domestic economy caused many firms to reconsider whether the outlook was as bad as they thought. Hence, domestic orders picked up again — even though export orders remained weak.

Looking ahead, we need to balance the impact of three major sectors. Domestic final demand remains strong with the help of low interest rates, which won't change soon. Inventory stocks are too high, so some adjustment can be expected over the next several months. Export orders will remain weak — although probably not as weak as many thought a few months ago.

It turns out that none of the gloom-and-doom scenarios have come to pass; there is no global meltdown. The countries of Southeast Asia are grudgingly meeting their obligations; they realize there is no other sensible choice. Of course U.S. exports of discretionary goods to Southeast Asia are down sharply, but exports of capital goods are not. These countries know they must continue to purchase the latest cutting-edge technology for their export industries.

Last month, we discussed our concern that higher labor costs and inflation would lead to Fed tightening later this year. That is still a valid concern. However, at the moment, it appears no one else is worried. Hence, interest rates probably will not rise very much until after midyear; and except for an immediate reaction in stock prices, the U.S. economy will not be affected until early 1999.

The rebound in the future component of the APICS index in February suggests the worst of the Asian crisis has passed, which means real growth this year will remain at or above average rates.

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

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

1998

JAN
48.1
57.8
52.7
52.9
48.4
51.8

FEB
52.0
40.7
51.4
51.1
49.0
48.8

FUTURE COMPONENT

NEW ORDERS

PRODUCTION PLANNING

I/S RATIO

FUTURE COMPONENT

TOTAL APICS INDEX*

1997

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

1998

JAN
37.2
48.6
40.0
41.9
46.8

FEB
55.1
50.1
38.6
47.9
48.4

* Current and Future Components with equal weights

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