The APICS Business Outlook Index fell to 47.4 from 52.3 in April. The Current Component dropped to 47.5 from 50.8, while the Future Component declined to 47.2 from 53.9. All of the series in the index were weaker except inventory stocks.

The April results suggest a growing dichotomy in the economy. The sectors likely to be affected by lower interest rates, namely construction and consumer goods, continued to rise at average rates, with the index for both these groups near 50. Yet sectors of the economy more directly affected by international considerations, such as industrial machinery and electronics, both posted index values near 45, indicating slight declines.

Six months ago, it was generally believed that the Southeast Asian crisis would cause a decline in U.S. growth in 1998. When that did not materialize, the pendulum swung to the other extreme; the decline in Asian gross domestic product (GDP) would have virtually no impact on the U.S. economy.

The April APICS figures indicate the results are midway between these two extremes. The sharp decline in Asian growth this year, coupled with the stronger dollar, will indeed take its toll on net exports. On the other hand, the lagged effect of the decline in interest rates last year has strengthened construction and discretionary consumer spending.

If these two factors were evenly balanced, the APICS index reading for April would be near 50, but it dropped to 47.4.

Thus, at least temporarily, construction and discretionary consumption are advancing at a slower rate. This finding would be consistent with the lack of any further decline in bond rates over the past five months, plus the recent slowdown in discretionary consumption caused by several temporary factors, including early income tax refunds and unusual weather patterns.

The April APICS results also imply a heightened negative impact from the decline in net exports and the stronger dollar. That is most apparent in the decline in the index of new orders to 44.6 from 52.3. Yet if that is indeed the case, the dip in the overall growth rate over the next few months will provide some breathing room for the economy in general, and labor markets in particular.

Current Conditions Components
• Manufacturing Shipments were unchanged in April; shipments of construction materials and consumer durables failed to rise in April after having increased significantly during the first quarter. In March, the APICS index showed a 0.5 percent rise in shipments. Preliminary Commerce Department figures reported a 1.4 percent gain in durable goods shipments for March; nondurable goods figures are not yet available but are expected to show a smaller gain.

• Manufacturing Employment fell about 10,000 in April. Over the past two months, the APICS index has indicated an average decline of about 5,000 per month, close to the reported Bureau of Labor Statistics (BLS) figures of an average monthly gain of 2,000. The April BLS data might show some bounce-back, but even if that does occur, it seems clear that the hiring boom in the manufacturing sector, which added an average of 28,000 jobs per month from June 1997 through January 1998, has come to an end.

• Manufacturing Production was unchanged in April, according to the APICS index. As noted previously, our seasonals are different from those used by the Federal Reserve Board in their calculation of industrial production.

• Manufacturing Inventory Stocks probably rose 0.2 percent in April after having fallen an estimated 0.2 percent in March. The uptick in inventory stocks probably reflects the weakness in April shipments.

• Unfilled Orders fell slightly in April, since new orders were weaker than shipments. According to Commerce Department data, unfilled orders fell in March, but all of that decline was due to the decreasing backlog of aircraft orders. Excluding that sector, unfilled orders were flat in March. Over the next several months, unfilled orders in aircraft will probably continue to diminish significantly, whereas other unfilled orders are not expected to show much of a change in either direction.

Future Conditions Components
• Durable Goods New Orders fell about 0.5 percent in April. Last month, preliminary Commerce Department data indicated that durable goods new orders rose 0.4 percent, precisely the amount calculated by the APICS survey � but new orders excluding transportation equipment, which is actually the component measured by this index, rose 0.9 percent. For April, a fairly steep decline in orders for industrial machinery should result in a 0.5 percent drop in total durable goods new orders, excluding aircraft and defense.

• The index for Production Planningprojects an average gain of 0.2 to 0.3 percent per month for the next three months. Hence, some of the decline in new orders and shipments seen in April is believed to be temporary.

• The actual-to-desired Inventory/Sales (I/S) Ratio rose slightly in April; this is an inverted series. The gain was due to the slight rise in inventory stocks when shipments were unchanged. However, the APICS results indicate that, for most companies, inventory stocks are still close to desired values, with little change in the I/S ratio expected over the next few months.

How Much Will the Economy Slow Down for the Rest of 1998?
This report is being written before the announcement of first quarter real growth, but it is generally expected that real GDP rose at a 3.5 to 4 percent annual rate last quarter. If this rate were to continue, it would almost certainly boost inflation and interest rates, given that wage rates and unit labor costs have accelerated over the past two quarters. That would lead to slower growth late this year and for much of 1999.

Alternatively, if growth were to slow down this quarter, that would presumably ease inflationary pressures, and interest rates might remain stable. Thus, it is not a question of whether the growth rate will diminish over the next few quarters; the issue is whether that decline will be caused by higher interest rates or lower net exports.

Bond yields fell approximately 1 percent from April to December last year; that would be expected to boost the growth rate by 1 percent this year. A decline in trade-weighted growth of 1 percent reduces exports by about 2 percent, while a 20 percent increase in the value of the dollar slices them about 10 percent. If exports are about one-eighth of GDP, that would reduce real growth by 1.5 percent, for a net decline of 0.5 percent. But so far, we have not yet seen any decline in the growth rate.

The sectoral results of the April APICS Index show that growth in construction and discretionary spending is still positive but has slowed, while industrial machinery and electronics are weakening. These results indicate that the gain in growth stemming from lower interest rates has, for the most part, already occurred, whereas the decline due to international considerations is still gaining speed.

There are two reasons that would occur. First, the decline in interest rates began before the Southeast Asian crisis started. Second, the lag between changes in interest rates on domestic demand is shorter than the lag between changes in foreign growth and exchange rates and international sales.

Putting these results together, we conclude that the gains in construction and discretionary consumer spending from lower interest rates will proceed at a slower pace for the rest of the year, while the weakness in net exports will intensify in the months ahead.

Translating this into real growth rates, the expected 3.75 percent growth last quarter can be tied to a 1 percent additional growth from lower interest rates, minus a 1 percent drop from lower net exports, leaving the growth rate at its previous level.

For the rest of this year, though, the boost in domestic demand from lower interest rates will fall from 1 to 0.5 percent, while the loss from weaker net exports will rise from 1 to 1.5 percent. Hence, the weakness seen in the April APICS data points to a decline in the real growth rate for the remainder of 1998 from 3.75 to 2.75 percent.

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
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
MAR	52.2	54.0	53.9	38.9	54.8	50.8
APR	47.3	45.2	47.1	50.4	47.4	47.5

FUTURE COMPONENT
	NEW ORDERS	PRODUCTION PLANNING	I/S RATIO	FUTURE COMPONENT	TOTAL APICS INDEX*
1997
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
MAR	52.3	51.5	57.8	53.9	52.3
APR	44.6	49.5	47.6	47.2	47.4
* Current and Future Components with equal weights

Copyright © 1998 by APICS — The Educational Society for Resource Management. All rights reserved.

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