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 BOCA RATON, Fla., Dec. 29 /PRNewswire/ -- Despite increases in production, shipments and new orders, manufacturing employment decreased in December, giving strong indication of no significant work force expansion in early 1994, according to the December American Production and Inventory Control Society, Inc. (APICS) Business Outlook Index. The index is based on confidential inventory, sales and production data from about 100 manufacturing firms.
 The overall index showed a modest rise in December for the second month in a row -- from 54.2 to 54.9 -- primarily driven by the current conditions component which rose from 52.8 to 54.5. (The current conditions component is based on manufacturing shipments, employment, industrial production, inventory stocks).
 The future conditions component continued its November pattern by falling slightly from 55.6 to 55.3. (The future component consists of durable goods new orders -- excluding aircraft and defense -- production plans, unfilled orders, ratio of actual-to-desired inventory/sales ratio).
 "Our key finding this month was the continuing pattern of short bursts of increased production and a longer workweek, but no concurring increase in employment. This will continue through early 1994," reports economist Michael Evans, creator of the Index. Evans cited as reasons: a) increases in manufacturing productivity at an unprecedented 5 percent annual rate since the beginning of the economic recovery -- nearly twice the long-term average; and b) improved methods of inventory control that allow manufacturers to quickly adjust production schedules to accommodate new orders.
 "Through increased productivity and the ability to swiftly respond to changes in orders from consumer and producer goods, firms can adapt to bursts in demand with a stable labor force. Therefore, with no significant increases in employment, it would be incorrect to assume that the surge in production and growth rate during the fourth quarter is a harbinger of a stronger economy."
 The new manufacturing-based index was unveiled on Sept. 29 (after nearly a year of testing) by Evans and Donald Ledwig, executive director of APICS, a not-for-profit, 70,000-member education society of manufacturing professionals.
 (Issued by APICS)
 Slower Growth Ahead for Early 1994
 The APICS Business Outlook Index was created and developed by Michael Evans of Evans Economics, Inc., in conjunction with APICS, a not-for-profit, 70,000-member educational society of manufacturing professionals. 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: Durable goods new orders (excluding aircraft and defense), production plans, unfilled orders, ratio of actual-to-desired inventory/sales ratio.
 -- Business Outlook Index; Average of Current and Future Conditions Components.
 For the second month in a row, the current component of the APICS Business Outlook rose, but the future component fell. The overall index increased from 54.2 to 54.9 in December; the current component rose from 52.8 to 54.5, but the future component fell slightly from 55.6 to 55.3.
 According to the APICS survey results, shipments, production and new orders all rose at above-average rates in December. Unfilled orders rose at average rates, while manufacturing employment declined slightly.
 Inventory stocks were flat, so the actual inventory/sales (I/S) ratio fell again. However, the desired I/S ratio fell even faster, indicating firms are not likely to rebuild stockpiles any further in early 1994.
 Thus production will continue to increase in the first quarter of 1994 but at a much more subdued rate than the last quarter of 1993.
 Current Conditions Component
 -- The index for manufacturing activity rose from 52.8 in November to 54.5 in December, slightly less than the average 2.5 point gain over the previous two months.
 -- For the fifth month in a row the index for shipments rose at above-average rates and is now approaching its peak cyclical values.
 -- Similarly, the index for production surged again in December, with an estimated gain of 0.6 percent. That is slightly less than the past two months because inventory stocks have now been rebuilt to desired levels.
 The other two components of the current conditions index did not rise in December.
 -- Our survey results show that manufacturing employment declined again in December, as has been the case all year. In our view, the gains in manufacturing employment in October and November reported by the BLS were overstated and did not actually occur.
 -- Inventory stocks were unchanged in December. After a slight uptick in November, firms decided not to increase stocks further.
 Future Conditions Component
 -- Following the pattern of November the future index continued to slide in December, falling 0.3 points to 55.3; in November it had dropped 0.5 points.
 -- New orders for durable goods excluding aircraft and defense rose sharply for the third month in a row. Some survey correspondents noted that export orders accelerated in December.
 -- Unfilled orders excluding aircraft and defense rose an estimated 0.3 percent, the same as the trend rate, so the index number is unchanged. Hence the increase in new orders was almost matched by a similar gain in shipments.
 -- The production planing index shows slower growth in the first quarter. In the survey, we ask participants for three months of data and then calculate a quarterly average. Last month, most firms indicated the slowdown would start in January; now the decline has slid one month, with most firms saying it will now start in February. That may indicate most of the deceleration in the overall economy will occur in the second rather than the first quarter.
 -- The index for the I/S term dropped from 91.2 to 84.0, still a very high reading but a move in the contractionary direction. According to the survey results, inventory stocks were flat in December; since shipments rose an estimated 1.3 percent, the actual I/S ratio declined again.
 However, the desired I/S ratio fell even further, boosting the ratio of the actual to desired I/S ratio from 1.00 to 1.02. Firms apparently want to cut inventory stocks further even though orders and shipments surged in the fourth quarter. That reinforces our prediction that production will advance at a more modest rate in the first quarter of 1994.
 Current Component
 Jan. 61.0 58.7 50.9 26.0 49.2 53.7
 Feb. 70.1 60.0 54.8 28.2 53.3 54.7
 March 60.0 59.6 53.6 25.4 49.7 50.0
 April 60.9 57.9 56.1 24.4 49.8 51.4
 May 61.1 59.4 56.3 24.6 50.4 51.5
 June 65.3 56.4 55.1 24.2 50.3 51.1
 July 54.8 54.8 51.3 22.8 45.9 49.2
 Aug. 66.4 53.8 50.6 20.2 47.8 48.6
 Sept. 70.6 52.1 49.4 18.6 47.7 50.9
 Oct. 78.5 51.6 51.9 18.6 50.1 53.1
 Nov. 83.5 51.6 54.3 22.0 52.8 54.2
 Dec. 89.1 50.6 56.2 22.0 54.5 54.9
 Future Component
 Jan. 63.9 26.9 76.4 65.5 58.2
 Feb. 59.9 23.3 72.9 68.2 56.1
 March 62.7 24.0 55.3 59.7 50.4
 April 58.4 23.0 52.0 78.5 53.0
 May 56.8 23.0 51.6 78.9 52.6
 June 63.4 21.4 35.9 87.1 52.0
 July 66.0 21.4 48.2 74.5 52.5
 Aug. 53.6 21.5 47.2 75.1 49.4
 Sept. 53.3 22.2 50.0 90.6 54.0
 Oct. 58.8 22.3 51.8 91.5 56.1
 Nov. 61.0 21.8 48.2 91.2 55.6
 Dec. 66.0 21.8 49.5 84.0 55.3
 (A) Current and future components with equal weights.
 Analysis and Interpretation
 During the fourth quarter, the length of the manufacturing workweek rose to a new post-World War II record high of 41.7 hours; durable goods overtime soared to 4.7 hours, also a post-war high.
 Some economists said that was caused by the new methods of inventory management and control. Inventory stocks were so lean, they claimed, that firms had to boost production sharply in order to refill the pipelines, since there were virtually no buffer stocks. According to this theory, firms will soon hire more workers, since they have been "caught short" time and again.
 We think that is an incorrect conclusion. Bursts in production have been the rule rather than the exception during the current upturn. From April through September 1991, industrial production rose an average of 0.6 percent per month; the length of the manufacturing workweek rose from 40.3 to 40.9 hours. After a brief pause, production rose an average of 0.6 percent per month again from February through May 1992, with a concomitant rise in workweek hours from 40.9 to 41.3. The third burst came from October 1992 through April 1993, with another 0.6 percent monthly average gain in production, accompanied by a rise in the workweek from 40.9 to 41.5 hours. Finally, production has risen an average of 0.6 percent to 0.7 percent for the September-December 1993 period, with the workweek rising from 41.4 to 41.7 hours in November.
 In each of these cases, a short burst in production was accompanied by a lengthening of the workweek -- but no gain in employment. We do not expect any gain to materialize in 1994 either for the following reasons.
 Since the recovery began, manufacturing productivity has been advancing at an unprecedented 5 percent annual rate -- about twice the long-term average. Fewer employees are needed per unit of output because more efficient machinery is being used. The strides in inventory management and control over the past several years are part and parcel of this unprecedented gain in productivity.
 Improved methods of inventory control are thus likely to lead to more mini-cycles of the sort seen in the past three years. Instead of reacting with a long lag, most manufacturing firms are now able to adjust their production schedules very quickly whenever orders move up or down, resulting in what appears to be a much more jagged monthly pattern of production.
 However, because manufacturing firms are able to control their production processes better and productivity is increasing at a 5 percent annual rate, they are able to undertake these occasional bursts with a stable labor force. Hence it would be inaccurate to assume that manufacturing employment will increase in 1994 just because the workweek recently lengthened.
 Furthermore, just as these firms are able to start on a dime, they can stop just as fast, with changes in orders from consumer and producer goods affecting production with a very short lag. After surging in September and October, discretionary consumer spending slowed to almost no gain in November and December, so production scheduling should follow with a very short lag.
 For this reason, it would be incorrect to assume the surge in production during the fourth quarter, and the estimated 4.5 percent to 5 percent growth rate for the quarter, are harbingers of a stronger economy.
 Instead, we look for real growth to decline to about 2 percent in the first quarter and 1 percent in the second quarter of 1994, before rebounding back above 2 percent in the second half.
 This forecast of more sluggish growth in the months ahead is based on several factors in addition to our survey findings that inventory restock piliing is almost complete, and that firms plan to decelerate their rate of production. Discretionary consumer spending and housing starts probably peaked last quarter and will decline in the first half of the year, both because interest rates recently rose and tax rates rise at the beginning of 1994.
 Retail sales were flat in December, as holiday shopping returns proved lackluster. A recent survey by the home-building industry showed a sharp drop in the expected number of new homes sold in the first half of 1994, after increasing steadily during the latter half of 1993.
 In the past, an upturn in industrial production, followed by a significant lengthening of the workweek, was sufficient to propel the overall economy to a higher growth rate for at least a year. That is no longer the case -- as has already been seen from the experience of 1991, 1992 and 1993 -- all bursts that were not followed by higher overall growth.
 Improved inventory management shortens reaction lags and increases the ability to switch more quickly. Now that the actual/desired I/S ratio has climbed back to 1.02, and firms plan to boost production at a much slower rate in the first quarter, the factors generating slower growth in early 1994 are all in place.
 NOTE: All opinions expressed in the report represent the viewpoints of Evans Economics, Inc., and are not necessarily those of APICS.
 -0- 12/29/93
 /NOTE TO EDITORS: For a complete copy of the report and to receive the index on a monthly basis, call Barbara Gleason, 703-237-8344, ext. 271, after Jan. 3, 1994.
 /CONTACT: Michael Evans of Evans Economics, 407-338-5300, for APICS/

CO: American Production and Inventory Control Society, Inc.; Evans
 Economics, Inc. ST: Florida IN: ECO SU:

IH-KD -- DC010 -- 7840 12/29/93 15:26 EST
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