May 1998 • Volume 8 • Number 5
APICS Business Outlook Index:
Manufacturing Sector Poised for Steady Growth
By Michael K. Evans, Ph.D.
The APICS Business Outlook Index rebounded again in March, improving to 52.3 from 48.4. The current component rose to 50.8 from 48.8, while the future component continued its recent strong advance, rising to 53.9 from 47.9 in February and 41.9 in January.
The only series in the current component that weakened in March was inventory stocks, which fell to 38.9 from 51.1, indicating that firms are finally taking steps to bring their inventory stocks into line with sales. All of the other series in the current component were well above 50.
In particular, manufacturing employment, which had slipped from 57.8 to 40.7 in February — a result supported by the drop in manufacturing employment reported by the Bureau of Labor Statistics (BLS) — rebounded to 54.0.
In the future component, new orders slipped slightly to 52.3 from 55.1, while production planning rose slightly to 51.5 from 50.1. Firms also reported that the actual-to-desired inventory/sales ratio fell sharply in March.
We estimate that real gross domestic product (GDP) increased at a 3.5 percent annual rate in the first quarter. Based on these APICS results, it is likely that the overall economy will grow at about a 3 percent rate in the second quarter, and probably the second half as well. The contractionary impact of the stronger dollar and the Asian situation have been fully offset by the expansionary impact of lower interest rates and strong growth in real disposable income.
Current Conditions Components • Manufacturing Employment rebounded in March after dropping in February. At 54.0, the APICS index for employment is slightly below the 55.7 average for the period from April 1997 through January 1998. The March figure is equal to a 15,000 to 20,000 gain in manufacturing employment. The survey results indicate that the drop in February was a one-time event and not indicative of future trends.
• Manufacturing Production rose 0.4 percent in March, up from 0.2 percent in February, which means the average monthly gain in the first quarter was 0.3 percent. We expect that the Federal Reserve Board figure showing no change in manufacturing production in February will be revised up, and that data will eventually show the same 0.3 percent average monthly gain.
• Inventory Stocks declined an estimated 0.2 percent in March after having risen for the previous five months. This decline probably reflects a reaction to the drop in durable goods sales from September through January. Transportation snafus are not yet unwound, with Union Pacific indicating it would not be sending any freight south for at least several weeks. However, the temporary softness in sales probably caused firms to reduce their inventory stocks, even though logistical problems still remain a nightmare for many companies.
• Unfilled Orders rose an estimated 0.3 percent in March, after having declined for each of the past five months. Last month, the APICS survey reported a slight drop of 0.1 percent, while the Commerce Department figures showed a larger decline. The uptick in unfilled orders for March is attributable to a substantial gain in new orders for industrial machinery, where the unfilled orders/sales ratio is much higher than for construction, electronics, consumer durables or nondurables. Future Conditions Components • The index for Production Planning rose slightly in March, advancing to 51.5 from 50.1. That indicates an average monthly gain in manufacturing production of 0.3 percent in the second quarter, the same as the first quarter.
• For the past five months, APICS survey firms reported that the actual Inventory/Sales Ratio was rising faster than the desired ratio. That was attributed to a) the temporary softness in shipments that started in October and b) transportation system delays. While the latter factor is still intact, firms brought their actual I/S ratios down closer to desired levels in March. That is a positive development for the second quarter, since production should not be depressed by excessive inventory stocks. It's Weaker Exports Instead of Higher Interest Rates The full answer, however, is somewhat more complicated. Last year, the economy was growing at an unsustainable rate. When that situation occurs, something must give way. The choices are a) higher inflation, b) tighter monetary policy, or c) a decline in net exports.
In the past decade, we grew accustomed to monetary policy tightening when the economy reaches this juncture. However, this time the Fed was concerned about the fragility of the world economy in the aftermath of the Southeast Asian situation. Hence, it did not tighten even though the unemployment rate continued to decline and signs of acceleration in wage rates were widely reported. The Fed's task was also helped by the fortuitous drop in oil prices and a benign rate of core inflation.
Even if there had never been an Asian crisis, the U.S. economy still would have grown about 3 percent this year, but the mix would have been different. Exports would have remained strong, while interest-sensitive sectors of the economy would have suffered. Because of the Asian situation, the reverse mix has occurred: Construction is strong, whereas net exports are much weaker.
How does all this play out in reference to the APICS survey? Based on some preliminary sectoral data, we can say that fabricated metals and building materials are currently the strongest sector; lower interest rates have clearly boosted economic activity in that sector. Both residential and nonresidential construction have benefited.
The other sectors are mixed, but electronics and high-tech products appear to be improving after some short-term weakness over the past few months. Indeed, that result might explain why weak earnings reports in that sector have not been followed by immediate stock market selloffs.
The industrial machinery sector is mixed. New orders improved in March, but production planning for the second quarter remains weak. Consumer durables are also mixed, with motor vehicles likely to show little improvement over the next few months. Finally, nondurables remain the weakest sector, hurt the most by exports while showing little gain associated with lower interest rates.
•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
CURRENT COMPONENT
1997
1998
FUTURE COMPONENT
NEW ORDERS
PRODUCTION PLANNING
I/S RATIO
FUTURE COMPONENT
1997
1998
• Manufacturing Shipments continued their modest gains in March, rising an estimated 0.5 percent, the same as February. The Commerce Department reported a 2.2 percent gain in durable goods shipments in February, but that followed a reported 1.3 percent drop in January, whereas the APICS figures showed only a modest decline for that month. Based on the APICS data, manufacturing shipments rose at a 4 percent annual rate in the first quarter, a robust performance considering that wholesale prices fell this quarter.
• Durable Goods New Orders Excluding Transportation rose an estimated 0.4 percent in March, less than the 0.7 percent gain for February. The Commerce Department figures for February showed a 1.7 percent drop in new orders, but all of that decline occurred in new orders for civilian aircraft and defense; the APICS survey does not include these categories. The February Commerce figures showed all other durable goods new orders rose $2.2 billion, or a gain of 1.2 percent, even larger than the February APICS figure. The further gain of 0.4 percent for March points to continued gains in the industrial sector.
For the first time in six months, the APICS Index has moved back above the 50 mark that indicates average growth in the manufacturing sector. Does this mean the Asian crisis was just a flash in the pan? Yes and no. The short answer is that the negative impact from the widening trade deficit to Southeast Asia — and a concomitant drop in net exports to the rest of the world because of the stronger dollar — has been fully offset by the strength of domestic spending stemming from lower interest rates and robust gains in real disposable income, helped in part by lower oil prices. As a result, growth this year should average about 3 percent, with the unemployment rate remaining stable.
All opinions expressed in this report represent the viewoints of the Evans Group 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:
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