By Michael K. Evans

The results of the individual components were mixed. Both current and planned production were quite strong, registering around 60. On the other hand, shipments and new orders both slipped, falling to 45.2 and 47.2 respectively. Several firms reported stronger production but weaker shipments. This suggests either that inventory stocks are accumulating, which seems unlikely, or that prices are falling, since shipments are in dollar terms and production is in volume terms.

The employment index registered 54.1, down from 56.9 in May. This is the third consecutive month it has been above 50, and the sixth month out of the last seven. Hence, firms appear reasonably optimistic about the future as they continue to add employees.

The strong gains in expected production for the third quarter point to an increase in manufacturing activity of about 4 percent in the second half of the year and, therefore, a growth rate of 3 to 3.5 percent, up from an estimated 2.5 to 3 percent for the second quarter. Thus the expansion should continue unabated.


Current Conditions Components
•Manufacturing Shipments slumped in June; the index fell to 45.2 from 54.4 as many firms reported a dip in shipments at the same time that their production increased. Considering the recent decline in the Producer Price Index (PPI), this probably reflects somewhat lower prices for most manufactured goods, especially in the metals area.

•Manufacturing Employment remains robust, with gains averaging 10,000 to 15,000 per month since last December. This is a bigger gain than shown by the Bureau of Labor Statistics (BLS); but it raised its benchmark estimate by 180,000, or 15,000 per month, in the latest annual revision. So while the BLS figures show little or no change in monthly employment, but a 15,000 average monthly gain in the yearly revisions, the APICS figures have shown a steady gain over the past seven months. The June employment gain is expected to remain near 15,000.

•Manufacturing Production rose an estimated 0.8 percent in June; some of this represents the catch-up from the auto strikes. The Fed originally announced that manufacturing production fell 0.2 percent in April, but that figure was revised to a 0.2 percent gain. May production reportedly rose 0.5 percent, even though motor vehicle production increased a relatively modest 1.2 percent — less than half of the 2.7 percent decline in April.

Motor vehicle production is estimated to rise about 3 percent in June, which would add 0.2 percent to the overall manufacturing index. In other words, manufacturing production, excluding motor vehicles and parts, should rise 0.6 percent in June.

•Unfilled Orders were little changed in June. The index rose slightly from 48.8 to 52.6, reflecting the slowdown in shipments in June. Although new orders fell slightly, the drop in shipments was somewhat greater. But the change is small, as order backlogs have been fairly stable for the past three months.

•Manufacturing Inventory Stocks continued to fall slightly in June, with the index virtually unchanged at 47.2, indicating a 0.1 percent drop. The Commerce Department measure of stocks, which treats inventory valuation adjustment differently, is expected to show a 0.2 percent gain.


Future Conditions Components
•New Orders for durable goods, excluding aircraft and defense, slipped in June, declining an estimated 0.3 percent. In May, the APICS survey called for a 1 percent increase, compared with the Commerce Department figures showing a 0.6 percent rise in durable goods new orders, excluding transportation. Motor vehicle orders will probably rebound strongly in June, in which case total new orders could rise as much as 1 percent, compared with the 0.3 percent drop indicated here.

•The index for Production Planning shows a robust gain of 0.6 percent per month for the next three months. This may be an overstatement, but apparently reflects the fact for many firms that summer shutdowns this year will be shorter and milder than usual. Thus, on a seasonally adjusted basis, industrial production could rise sharply in July and August.

•The actual-to-desired Inventory/Sales Ratio was little changed in June, moving up to 51.4 from 50.0. This is an inverted series, so an increase in the index means firms have reduced their actual I/S ratio relative to the desired level. A reading near 50 indicates that inventories are in balance, and firms will not be taking any explicit action to boost or reduce stocks relative to trend levels.


No signs of slowdown ahead
When will the Goldilocks economy turn into the Cinderella economy?

Currently the economy is not too hot and not too cold, but just right. However, the concern mounts that at some point in the future, the clock will strike midnight and the economy will turn into a pumpkin.

No business cycle expansion has ever lasted forever. On the other hand, in several other industrialized countries, booms have continued for well over a decade. There is certainly nothing inherent in the current economy to suggest a downturn this year or next. The Fed does not have to tighten further to dampen inflation; inventory stocks are lean; the economy is not bumping up against many bottlenecks and shortages; and consumer spending remains robust even though it took a slight breather from March through May.

Most of the recent discussion about the economy has centered on the disparity between the 5.8 percent growth rate reported for the first quarter and the expected drop to about 2.25 percent in the second — although our forecast calls for a somewhat higher growth of 2.5 to 3 percent because we think the retail sales numbers for May will be revised up.

However, the data in the APICS survey — and for that matter, the underlying government data for employment and production — shows that this dichotomy was more apparent than real. Although the June figures are not yet available, a reasonably intelligent guess indicates that payroll employment rose an average of 240,000 in the second quarter, compared with 228,000 in the first quarter.

Furthermore, the average monthly gain in industrial production will be 0.4 to 0.5 percent this quarter, compared with 0.3 percent in the first quarter. We might note parenthetically that the change in March production, which was originally reported at 0.9 percent, has been revised all the way down to 0.4 percent — very similar to the APICS survey report for March.

Seen against this background, there is little doubt that the slowdown in consumer spending was temporary. It can be ascribed to several different reasons: the mild winter followed by wet spring weather, unusually large personal income tax payments in April, strikes in the auto industry and, possibly, the March/April stock market slump. Whatever the relative importance of the reasons, the June retail sales figures indicate a substantial rebound, which we think will remain in place for the rest of this year.

If the slowdown in consumer spending was not temporary, this decline presumably would have shown up in the APICS index. New orders would have fallen, production plans would have slackened, and firms would have stopped hiring. Even though the new orders index did dip to 47.2 in June, it averaged 51.9 for the second quarter, up sharply from the first quarter. Also, the robust gains in production planning indicate firms are less likely to take extended summer shutdowns.

Except for a temporary dip in the stock market, the .25 percent hike in the Federal funds rate in March has had virtually no impact on the economy. The rise in bond yields has now been entirely reversed and will not cause any decline in growth during the second half. In fact, growth was never as high in the first quarter, nor as low in the second quarter, as indicated by the Gross Domestic Product statistics. Thus the growth rate in the second half should be almost as high as the 4 percent average in the first half.

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