APICS BUSINESS OUTLOOK INDEX
Prepared by The Educational Society
For Resource Management
Second Half Growth Remains Moderate
September Report Highlights
The APICS Business Outlook Index rebounded to 54.3 in September from 47.5 in August, when activity was temporarily depressed by the UPS strike. Because of the impact of that strike, the last two months should be considered together. On that basis, the APICS index has averaged 50.9, compared to 53.0 for the previous four months.
The current component of the index rose to 55.2 from 50.4, which means the most recent 2-month average of 52.8 is almost the same as the average of 52.5 over the previous four months. The future component of the index rebounded to 53.5 from 44.6, but its 2-month average of 49.0 is well below the previous 4- month average of 53.4, indicating positive but slower growth in the fourth quarter.
Turning to the individual components, the biggest rebounds occurred in shipments and production, both of which recovered to approximately 60 in September from 40 in August. However, since these changes were related to the UPS strike, they do not indicate stronger growth in the upcoming quarter, although the September manufacturing figures should be strong.
By comparison, manufacturing employment grew at a slower rate in September, with that component of the index falling to 53.7 from 60.2. New orders rebounded only to 52.6, and production plans for the next three months continue to indicate modest gains. Hence the APICS index indicates a substantial drop in the growth rate of real GDP from the revised 4.1% annual rate reported for the first half.
Future Component Lagged 3 Months
APICS Business Outlook Index
Current Component CUR SHIP EMPL PROD INV UOR COMP Sep 96 63.3 43.3 56.0 51.8 51.7 53.6 Oct 53.0 45.2 50.2 42.4 45.7 47.7 Nov 46.7 43.7 52.1 50.8 46.6 48.3 Dec 59.5 54.5 50.0 41.0 49.7 51.2 Jan 97 38.5 51.4 43.8 37.2 40.5 42.3 Feb 47.5 56.1 53.2 39.7 47.4 48.8 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 52.4 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 Total Future Component FUT APICS NOR PRPL I/S COMP INDEX-X Sep 96 56.9 54.0 53.6 54.0 53.8 Oct 50.5 55.1 51.1 50.6 49.1 Nov 41.9 49.3 43.3 45.3 46.8 Dec 55.3 47.5 57.1 52.4 51.8 Jan 97 41.7 56.5 50.7 49.6 45.9 Feb 43.6 48.4 48.8 46.9 47.8 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
*–Current and Future Components with equal weights.
Current Conditions Components
–Manufacturing shipments rebounded sharply in September, offsetting the big drop in August. The advance durable goods report from the Commerce Department indicated a 1.4% drop in shipments, in line with our survey results showing a 1% decline. The survey results indicate a 1.2% rebound in shipments this month. This fluctuation is presumably tied to the UPS strike and does not reflect the underlying strength or weakness of the overall economy over the past two months.
–Manufacturing employment was little changed in September, as opposed to the strong gains in August. Last month, the APICS survey indicated a 20,000 gain in manufacturing; the preliminary BLS figures showed an even larger 47,000 gain, but about half of that increased reflected returning auto workers following a series of strikes. This month, with strike activity minimal, manufacturing employment should increase 5,000 to 10,000.
–Manufacturing production also rebounded strongly in September, according to the APICS survey, but our figures disagree with the Fed numbers on production. Apparently different seasonal factors are being used. After falling 0.2% in August, the APICS survey indicates that production rebounded 0.6% in September. The Fed figures, on the other hand, showed a much more robust gain in August, although their preliminary figures have been heavily revised this year. We think production rose 0.4% in July, fell 0.2% in August, and rebounded 0.6% in September, for an average gain of 0.3% over the past three months–and expect that eventually, the revised Fed figures will show the same growth rate.
–Unfilled orders posted another substantial gain in September, rising an estimated 0.4%. Last month, we estimated that order backlogs rose 0.6%; the advance durable goods report indicated an even stronger 1.1% increase. Some analysts have suggested that such big increases in order backlogs point to robust growth in the months ahead. Several months ago, though, we switched unfilled orders from the future component to the current component when a detailed analysis of the individual components indicated that unfilled orders moved more in line with current than future activity.
–Manufacturing inventory stocks, after rising sharply in August, fell an estimated 0.1% in September. The APICS survey results continue to show that except for months disrupted by strike activity, firms try to keep inventory stocks as lean as possible.
Future Conditions Components
–New orders excluding aircraft and defense rebounded moderately after a fairly sharp decline in August. The Commerce Department figures for August were agnostic on this point: while total durable goods new orders reportedly rose 2.7%, new orders for nondefense capital goods excluding aircraft and parts, which we and many other economists consider the key number, fell 5.4% after rising 6.6% in July. While that swing is clearly exaggerated, it is in line with the APICS results showing about a 1% gain in July followed by a 1% decline in August. For September, the survey indicates about a 1/2% increase in new orders excluding aircraft and parts, in line with moderate but subdued growth for the fourth quarter.
–The index for production planning continues to show only moderate gains in the next three months. The September index rebounded to 51.6, the first time since June that it had risen above 50, but these figures are well below the second quarter average of 54.6. For the fourth quarter, the average gain in production is expected to slow to 0.2% per month.
–The index for the ratio of the actual to desired inventory/sales ratio, which is reported on an inverted basis, rose to 53.5 in September from 44.6 in August; once again, the actual I/S ratio has declined relative to the desired level. The dip in August probably occurred because of the UPS strike, which caused some firms to accumulate unwanted inventories because the goods should not be shipped. The September survey results indicate that firms are back to keeping inventory stocks unusually lean.
Yet Another Soft Landing “On
Schedule”
While 4%+ growth does wonders for boosting profits and employment, it nonetheless raises concerns about whether the economy will overheat, which could cause the Fed to tighten and eventually bring the expansion to a halt. In fact such fears are overblown; the so- called Phillips curve is finally receiving a well-deserved burial. Nonetheless, a slowdown in the growth rate to about 2½% in the second half of the year will dampen those pressures in financial markets and reduce long-term interest rates, hence setting the stage for yet another year of robust growth in 1998.
In terms of the APICS survey, the key factor pointing to slower growth in the second half has been the sharp decline in the index of production planning, which averaged 48.3 in the third quarter, compared to 54.6 in the second quarter. That is a substantially larger drop than the comparable figures for new orders, which fell only slightly to 50.6 this quarter from 51.9 last quarter. There has been little change in the actual to desired I/S ratio; except for the UPS strike, these figures have indicated a declining I/S ratio in every month since February.
In terms of the major economic sectors, the September APICS report shows that new orders and production planning are strongest for consumer goods, mixed for machinery, and weakest for the construction sector. The drop in orders and planned production for construction- related industries reflects the rise in interest rates that occurred earlier this year, and the decline in housing starts over the past two months. That sector is expected to remain weak for the rest of this year.
The outlook for the machinery sector is mixed, with industrial machinery likely to show sluggish gains for the rest of the year. Capacity utilization remains well below the rates that have previously been associated with full employment, and export markets are weakening because of the stronger dollar.
On the other hand, consumer spending remains robust, a result of full employment and fatter paychecks. Although the growth in employment is slowing down, that reflects a shortage of qualified labor as much as it does more moderate growth. Overtime, bonuses, profit- sharing and other increases that are not tied to the base wage rate continue to keep consumption moving ahead.
Thus based on the APICS survey results, the slower growth in the second half is tied primarily to sluggishness in construction, industrial machinery, exports, and smaller increases in inventory investment, whereas consumer spending will remain robust at least through the end of the year.
September 30, 1997 The Educational Society
For Resource Management
500 West Annandale Road, Falls Church, Virginia
Added to the WWW 10-03-97
Last updated on 10-03-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com
