Economic Growth to Continue in Second Half of 1998 Say Purchasing Executives

FOR RELEASE: May 5, 1998

Contact:   Zenobia Daruwalla
NAPM, Media Relations
Tempe, Arizona
602/752-6276 ext. 3015

Forecast Revenue Growth of 6.4%, Capacity Utilization 86.2%

(Dallas, Texas) -- Economic growth will be somewhat higher in the second half of 1998, say the nation's purchasing executives in their 55th Semiannual Economic Forecast. While a significant 76 percent expect their 1998 revenues to be greater than in 1997, they expect a 6.4 percent net increase in overall revenues compared to a 7.8 percent increase predicted in December 1997.

These projections are part of the 55th Semiannual Economic Forecast issued by the Manufacturing Business Survey Committee of the National Association of Purchasing Management, Inc. (NAPM). The forecast was presented today by Norbert J. Ore, C.P.M., chair of the NAPM Manufacturing Business Survey Committee and director, corporate purchasing, Chesapeake Corporation. "Purchasing executives report a similar level of optimism for the coming year than they did a year ago with 81 percent of them expecting business in the first half of 1998 to be better than or the same as the second half of 1997," said Ore. Industries expecting the greatest improvement in revenue over 1997 are (listed in order): Paper; Printing & Publishing; Chemicals; Furniture; Fabricated Metals; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Rubber & Plastic Products; Electrical Components & Equipment; Industrial & Commercial Equipment & Computers; and Apparel.

Purchasers report operating at 86.2 percent of their normal capacity, down slightly from 86.4 percent reported in December 1997. Purchasing executives predict that capital expenditures will increase by 6.6 percent in 1998 compared to the December 1997 prediction of 14.9 percent. Purchasers also forecast that they will continue to reduce their purchased inventory to sales ratio and that employment will increase modestly in 1998. Their major economic concerns are labor and benefits costs, weak economy, inflation, Asian economies, rising interest rates, strong dollar, material shortages, environmental regulatory costs, labor availability, and supplier deliveries.

Purchasers expressed little concern over possible increased materials costs, stating that prices paid for materials decreased during the first four months of 1998 by .7 percent. During all of 1998, they anticipate a .7 percent decrease in prices, therefore, they have expectations of no price increases, on average, for the balance of the year. They also forecast a 2.6 percent increase in their overall labor and benefits costs for 1998. Purchasers are predicting growth in both their imports and exports, with imports growing more rapidly than exports. Purchasers have slightly higher expectations for the U.S. Dollar to gain strength versus the currencies of major trading partners in the coming year than they did in December 1997.

Recapping previous NAPM Survey Data, the following information was found:

  • In its 54th Semiannual Economic Forecast, released December 9, 1997, NAPM's Manufacturing Business Survey Committee predicted the economy would continue to grow during 1998. They predicted increases in manufacturing employment, stable prices, and continued growth in imports and exports. They projected nominal revenues would increase by 7.8 percent overall in 1998. They also expected labor and benefits costs to rise 3.1 percent in 1998.

  • On May 1, 1998, the monthly release of the Manufacturing NAPM Report On BusinessÒ indicated that the manufacturing sector grew for the 21st consecutive month in April 1998, and at a slightly slower rate of growth than in March. The overall economy grew in April at a slower rate of growth than in March. Ten of 20 industries reported improvement over March 1998.

  • The Purchasing Managers' Index (PMI) in April declined slightly to 52.9 percent from 54.8 percent in March. Past experience indicates that if the average PMI for all of 1998 equaled the April value that would be consistent with real gross domestic growth (GDP) of approximately +3.2 percent for 1998. Over time, a PMI in excess of 50 percent generally indicates an expansion in the manufacturing sector, while a PMI in excess of 43.6 percent generally indicates an expansion of the overall economy.

OPERATING CAPACITY

Purchasing executives report that their companies are currently operating at 86.2 percent of normal capacity. Our members have now reported operating capacity above 85 percent for nine consecutive Semiannual Forecasts. The decrease from 86.4 percent reported in December 1997 is consistent with the growth experienced by the manufacturing sector in recent months. The following industries are operating at the highest levels of capacity: Glass, Stone & Aggregate; Instruments & Photographic Equipment; Apparel; Petroleum; Primary Metals; Paper; Chemicals; Wood & Wood Products; Textiles; and Furniture.

Operating Capacity
  May'95 Dec'95 Apr'96 Dec'96 May'97 Dec'97 May'98
90%+ 57% 50% 46% 55% 48% 50% 52%
50%-89% 43% 49% 53% 44% 51% 49% 46%
Below 50% 0% 1% 1% 1% 1% 1% 2%
Est. Overall Ave. 88.1% 85.9% 86.0% 86.8% 86.4% 86.4% 86.2%

PRODUCTION CAPACITY

Production capacity in manufacturing is expected to increase 4.9 percent in 1998 compared to 5.3 percent in December 1997. For 1998, 54 percent of purchasing executives reported an average capacity increase of 9.6 percent, three percent reported decreases averaging 7.3 percent, and 43 percent reported no change.

This compares to a capacity increase of 8.1 percent for all of 1997 and a predicted 1998 increase of 5.3 percent in December 1997. The principal means of achieving increases in production capacity in 1998 were (in order of importance):

  1. Additional plant and/or equipment
  2. Replacement of equipment with more technically advanced equipment
  3. More hours worked
  4. More shifts worked
  5. Fewer plant shutdowns
Production Capacity
  1997 CHANGE 1998 CHANGE 1998 CHANGE
  Reported
Dec '97
Magnitude
of Change
Predicted
Dec '97
Magnitude
of Change
Predicted
May '98
Magnitude
of Change
Higher 62% +14.1% 60% +9.8% 54% +9.6%
Same 32% N/A 35% N/A 43% N/A
Lower 6% -11.5% 5% -12.3% 3% -7.3%
Net Average   +8.1%   +5.3%   +4.9%

PREDICTED CAPITAL EXPENDITURES - 1998 vs. 1997

Looking forward, purchasing executives are expecting substantially smaller increases in capital expenditures in 1998 than predicted in December 1997. The 33 percent of members expecting to spend more on capital expenditures in 1998 predict an average increase of 38.3 percent. However 29 percent expect a decrease averaging 21.5 percent. Considering the 38 percent who expect to spend the same on capital expenditures in both years, the overall net average change forecast for 1998 is an increase of 6.6 percent. Industries expecting higher capital expenditures in 1998 over 1997 are (in order of percentage increase): Paper; Printing & Publishing; Glass, Stone & Aggregate; Primary Metals; Furniture; Fabricated Metals; and Petroleum.

Predicted Capital Expenditures - 1998 vs. 1997
  Predicted
Dec '97
Magnitude
of Change
Predicted
May '98
Magnitude
of Change
Higher 44% +47.8% 33% +38.3%
Same 32% N/A 38% N/A
Lower 24% -25.1% 29% -21.5%
Net Average   +14.9%   + 6.6%

PRICES - Changes Between End of 1997 and May of 1998

Purchasing executives report that the prices they paid in the first part of 1998 decreased by an average .7 percent. Purchasers who reported paying higher prices during the period of January through April 1998 numbered 29 percent and indicated average price increases of 3.1 percent. Those experiencing price decreases included 42 percent of members and an average decrease of 3.9 percent, while 29 percent realized no change in prices.

Price Changes Between End of 1997 and May of 1998
  Predicted
Dec '97
Magnitude
of Change
Reported
May '98
Magnitude
of Change
Higher 36% +2.8% 29% +3.1%
Same 37% N/A 29% N/A
Lower 27% -2.6% 42% -3.9%
Net Average   +0.3%   -0.7%

PRICES - Predicted Change Between End of 1997 and End of 1998

Extending the price forecast to all of 1998, the proportion of purchasers expecting price increases declined from the December 1997 prediction. The net average price change is expected to decline .7 percent. The 39 percent forecasting higher prices predict an average increase of three percent, while the 44 percent forecasting lower prices expect an average decrease of 4.2 percent. Adding in the 17 percent who expect no change, there is minimal expected overall change in prices in 1998, an expectation which first surfaced in our December 1996 forecast. Industries predicting the largest increase over 1997 are: Paper; Printing & Publishing; Food; Wood & Wood Products; Furniture; and Leather.

Predicted Price Change Between End of 1997 and End of 1998
  Predicted
Dec '97
Magnitude
of Change
Predicted
May '98
Magnitude
of Change
Higher 53% +3.4% 39% +3.0%
Same 14% N/A 17% N/A
Lower 33% -3.6% 44% -4.2%
Net Average   +0.6%   -0.7%

PRICES - Predicted Change for May 1998 through December 1998

Predicted: All of 1998 -0.7%
Reported: Through May 1998 -0.7%
Predicted: Balance of 1998 0.0%

LABOR AND BENEFITS COSTS - Predicted Rate Change End of 1997 vs. End of 1998

Purchasing executives' expectation for change in labor and benefits costs for 1998 are slightly lower than they were in December 1997. Seventy-seven percent of members who expect increased labor and benefits costs expect them to grow by an average of 3.5 percent for all of 1998, while the two percent forecasting lower costs see them decreasing by an average three percent. Including consideration of the 21 percent who believe costs will remain stable, the expected overall net rate of increase is 2.6 percent between the end of 1997 and the end of 1998. This percentage is a .5 percentage point lower than the percentage predicted in December 1997, and a .2 percentage point lower than predicted in May 1997 for all of 1997.

Labor and Benefits Costs - Predicted Rate Change End of 1997 vs. End of 1998
  Predicted
Dec '97
Magnitude
of Change
Predicted
May '98
Magnitude
of Change
Higher 88% + 3.6% 77% +3.5%
Same 11% N/A 21% N/A
Lower 1% -3.0% 2% -3.0%
Net Average   + 3.1%   +2.6%

PURCHASED INVENTORY-TO-SALES RATIO

Purchasers continue to reduce their purchased inventories as has been consistently reported for the past nine years in the monthly Manufacturing NAPM Report on Business ®. In this forecast, 31 percent of members expect to reduce their purchased inventory-to-sales ratio during the balance of 1998. This compares to only eight percent who expect the ratio to grow and 61 percent who predict no change.

Predicted Change in Purchased Inventory-to-Sales Ratio
  For 1996
Dec '95
Balance of 1996
April '96
For 1997
Dec '96
Balance of 1997
May '97
For 1998
Dec '97
Balance of 1998
May '98
Greater 7% 5% 11% 8% 11% 8%
Same 60% 53% 55% 60% 60% 61%
Smaller 33% 42% 34% 32% 29% 31%
Diffusion Index 37.0% 31.5% 38.5% 38.5% 41.0% 38.5%

Note: A diffusion index above 50 percent would indicate an increase in the inventory-to-sales ratio; below 50 percent, a decrease in the ratio.

OVERALL MANUFACTURING EMPLOYMENT

NAPM's Manufacturing Business Survey Committee members forecast that manufacturing employment will increase in 1998 with 29 percent expecting greater numbers of workers. This is compared to the 40 percent who predicted higher employment for 1998 in NAPM's December 1997 forecast. With regard to 1998, 21 percent predicted lower employment compared to 15 percent who predicted fewer workers in December of 1997. The remaining 51 percent of members expect their employment levels to be unchanged for the remainder of 1998.

Predicted Change in Overall Manufacturing Employment
  For 1996
Dec '95
Balance of 1996
Apr '96
For 1997
Dec '96
Balance of 1997
May '97
For 1998
Dec '97
Balance of 1998
May '98
Higher 19% 21% 26% 30% 40% 29%
Same 47% 49% 54% 49% 45% 50%
Lower 34% 30% 20% 21% 15% 21%
Diffusion Index 42.5% 45.5% 53.0% 54.5% 62.5% 54.0%

Note: A diffusion index above 50 percent would indicate an increase in manufacturing employment; below 50 percent, a decrease in manufacturing employment.

RESTRUCTURING AND EMPLOYMENT CHANGES - Balance of 1998

Purchasers indicated that employment changes resulting from organizational restructuring are expected to be slightly greater during the balance of 1998 than their expectations a year ago for the remainder of 1997. Overall, 24 percent said restructuring would reduce their employment (19 percent modest decrease and five percent substantial decrease). A low 10 percent anticipate restructuring to increase their employment (seven percent modest increase and three percent substantial increase) and 66 percent indicated no employment change from restructuring during the balance of 1998.

Changes in Employment Resulting from Restructuring - Balance of Year
  Balance of '95
May '95
Balance of '96
Apr '96
Balance of '97
May '97
Balance of '98
May '98
Substantial Decrease 2% 3% 2% 5%
Moderate Decrease 25% 41% 22% 19%
No Change 65% 49% 68% 66%
Moderate Increase 6% 7% 7% 7%
Substantial Increase 2% 0% 1% 3%
Diffusion Index 40.5% 31.5% 42.0% 43.0%

Note: A diffusion index above 50 percent would indicate an increase in the employment opportunities created by restructuring. Below 50 percent, a decrease in the employment opportunities.

U.S. DOLLAR - Predicted Strength vs. Major Trading Currencies - in 1998

Purchasing executives are slightly more optimistic concerning the prospective strength of the U.S. Dollar for 1998, relative to major trading currencies, than they were in December 1997. The average diffusion index for this forecast is 71.8 percent, compared to 70.2 percent for the December 1997 forecast. The strength of the dollar against the average of the three Asian currencies (78 percent) is significantly higher than the December average (74.4 percent), while the average for the other six currencies (68.6 percent) is slightly less than the December expectation of 68.1 percent.

U.S. Dollar - Predicted Strength vs. Major Trading Currencies - 1998

U.S. Dollar Will Be: Can.
$
British
Pound
Deutsch
Mark
French
Franc
Italian
Lira
Mexican
Peso
Korean
Won
Taiwan
$
Japanese
Yen
Stronger Than 41% 33% 39% 46% 56% 72% 75% 64% 68%
Same As 53% 56% 43% 41% 35% 22% 13% 24% 17%
Weaker Than 6% 11% 18% 13% 9% 6% 12% 12% 15
Diffusion Index 67.5% 61.0% 60.5% 66.5% 73.5% 83.0% 81.5% 76.0% 76.5%

Note: A diffusion index above 50 percent would predict a generally stronger U.S. Dollar; below 50 percent, a generally weaker U.S. Dollar, with the distance from 50 percent indicative of the predicted strength or weakness.

EXPORT BUSINESS - Predicted Change for Next Half Year (2nd Half of 1998)

For the next half year, purchasing executives have a lower level of optimism than they did in May 1997 and December 1997. Of the 82 percent of members who export, 41 percent predict an increase (36 percent moderate and five percent substantial) over the next half year. This compares to 58 percent in NAPM's December 1997 forecast where members expected an increase in the first half of 1998, and 55 percent in NAPM's May 1997 forecast where members expected an increase in the second half of 1997. Decreases in exports are expected by 20 percent (17 percent moderate and three percent substantial) and 39 percent anticipate no change in exports over the next half year. The 20 percent reporting a moderate or substantial decrease is the highest since NAPM began asking this question in 1987. The previous high was 12 percent reported in May 1993.

Predicted Change in Export Business - Next Half Year (2nd Half of 1998)
  Apr '96 Dec '96 May '97 Dec '97 May '98
Substantial Increase 4% 5% 6% 6% 5%
Moderate Increase 49% 49% 49% 52% 36%
No Change 40% 37% 39% 36% 39%
Moderate Decrease 7% 8% 5% 5% 17%
Substantial Decrease 0% 1% 1% 1% 3%
Diffusion Index 73.0% 72.5% 74.5% 76.0% 60.5%

IMPORT BUSINESS - Predicted Change for Next Half Year

Of the 79 percent of purchasers who import, 40 percent predict an increase in their imports over the next half year (31 percent moderate and nine percent substantial). This is about the same as the 41 percent who predicted an increase in December 1997. Twelve percent predict a decrease in imports of materials (12 percent moderate and zero percent substantial). Slightly less than half of survey members (48 percent) expect no change in imports. Continuing the comparison to December 1997, eight percent forecasted a decrease, and 51 percent saw no change.

Predicted Change in Import Business - Next Half Year
  Apr '96 Dec '96 May '97 Dec '97 May '98
Substantial Increase 1% 2% 6% 7% 9%
Moderate Increase 30% 34% 28% 34% 31%
No Change 51% 52% 58% 51% 48%
Moderate Decrease 16% 11% 7% 8% 12%
Substantial Decrease 2% 1% 1% 0% 0%
Diffusion Index 56.5% 62.0% 63.0% 66.5% 64.0%

BUSINESS IN 1998 - The First Half

In the first half of 1998 compared to the last half of 1997, 50 percent of members expect business will be better, while 19 percent expect it will be worse. Almost one-third of our members (31 percent) expect the first half of 1998 to be the same as the second half of 1997. The diffusion index for the current forecast declined to 65.3 percent from 71.5 percent in our December forecast.

Business: First Half 1998 vs. Last Half 1997
  Predicted
Dec '97
Predicted
May '98
Worse 12% 19%
Same 33% 31%
Better 55% 50%
Diffusion Index 71.5% 65.3%

BUSINESS IN 1998 - The Second Half

Members are optimistic about the second half of 1998 when compared to the first half of the year. The number of members who forecast the second half of 1998 to be better than the first half is 52 percent, while only 11 percent expect it to be worse and 37 percent expect no change.

Business: Second Half 1998 vs. First Half 1998
  Predicted
Dec '97
Predicted
May '98
Worse 9% 11%
Same 44% 37%
Better 47% 52%
Diffusion Index 69.0% 70.7%

BUSINESS IN 1998 - The Entire Year

Purchasers forecast that the entire year 1998 will be better than 1997. The 76 percent of members forecasting better business in 1998 than in 1997 estimate an average nominal (before adjusting for inflation) increase of 9.8 percent in their companies' revenues. This compares to an average nominal decrease of 13.5 percent forecast by the eight percent predicting worse business in 1998. Including the 16 percent who see no change in 1998, the forecast of overall net nominal growth in business revenues in 1998 over 1997 is an increase of 6.4 percent.

Business: 1998 vs. 1997 Revenues
  Predicted
Dec '97
Nominal
% Change
Predicted
May '98
Nominal
% Change
Higher 81% +10.1% 76% +9.8%
Same 15% N/A 16% N/A
Lower 4% -7.9% 8% -13.5%
Net Average   +7.8%   +6.4%

PROFIT MARGINS

Purchasing executives were asked about changes in profit margins that their companies may have recently experienced or were expecting during the balance of 1998. Their response indicated that 41 percent experienced an increase in profit margins during the October 1997 through March 1998 period while only 30 percent found margins worse during the same time. Looking ahead to the balance of 1998, 44 percent expect improved profit margins and 11 percent anticipate lower profit margins. The diffusion index indicates expectations of greater profit margins in the second half of 1998.

Profit Margins
  Oct '97 –
Mar '98
Balance
of 1998
Improved 41% 44%
No Change 30% 45%
Worse 29% 11%
Diffusion Index 56.0% 66.5%

Note: A diffusion index above 50 percent would generally indicate an increase in profit margins; below 50 percent, a decrease in profit margins.

SUPPLY CHAIN PRACTICES IN 1998

Responding to a special question regarding supply chain improvements in 1998, 69 percent of members stated that they plan to take new steps in 1998 to improve their supply chain management practices. Members also indicated a strong preference for consolidation of volume with fewer suppliers. Following that preference members indicated other initiatives as listed below:

  1. Consolidation of Volume with Fewer Suppliers
  2. Cost Reduction Initiatives
  3. Supplier Evaluation
  4. Longer Term Agreements/Partnering
  5. Supplier Certification
  6. Supplier Development
  7. EDI
  8. Outsourcing
  9. Quality Improvement Initiatives
  10. Continuous Improvement Programs

ECONOMIC CONCERNS

Labor and Benefits Costs are the number one concern as indicated by our members. It was mentioned 12.2 percent of the time by purchasing executives that completed the current survey. In second place is the concern about the economy, mentioned 6.8 percent of the time. In third place was inflation, mentioned six percent of the time. Rounding out the top six concerns were the Asian economies, rising interest rates, and the strong dollar (each mentioned 5.6 percent). The following are the 10 most frequently mentioned economic concerns compared to the percentage of times mentioned in December 1997, if at all:

Ten Greatest Economic Concerns
Concerns % of Times
Mentioned (Dec '97)
% of Times
Mentioned (May '98)
Labor & Benefits Cost 13.7 12.2
The Economy 9.9 6.8
Inflation 8.3 6.0
Asian Economies ----- 5.6
Rising Interest Rates 7.2 5.6
Strong Dollar 8.3 5.6
Material Shortages 5.4 5.2
Environmental/Regulatory Costs 5.0 4.2
Labor Availability ----- 4.1
Supplier Deliveries ----- 2.3

OUTLOOK - NEXT 12 MONTHS

Members' companies are more optimistic about the next 12 months than they were in December 1997. The 59 percent of members who are optimistic is the same percentage as December 1997, which was to that point the largest such group since May 1988 (60 percent). The 38 percent who are concerned is down from 40 percent in December 1997, and is the lowest such number since May 1994 (38 percent). The three percent of members who reported being worried or pessimistic is up slightly from one percent reporting that outlook in December 1997.

Outlook - Next 12 Months
  May '95 Dec '95 Apr '96 Dec '96 May '97 Dec '97 May '98
Worried/Pessimistic 4% 7% 8% 5% 4% 1% 3%
Concerned 52% 60% 64% 49% 40% 40% 38%
Satisfied/Optimistic 44% 33% 28% 46% 56% 59% 59%

SUMMARY

  • Operating Rate is currently 86.2 percent of normal capacity
  • Capital Spending to increase 6.6 percent in 1998 over 1997
  • Production Capacity to increase 4.9 percent during 1998
  • Prices decreased .7 percent since end of 1997
  • Overall 1998 Prices to decrease .7 percent
  • Labor & Benefits Costs to increase at a 2.6 percent rate in 1998
  • Inventory-to-Sales Ratio expected to continue reduction in 1998
  • Higher overall Manufacturing Employment in 1998
  • Dollar expected to remain strong vs. major currencies
  • Exports to continue to grow in 1998
  • Imports to continue to grow in 1998
  • Manufacturing Revenues (nominal) to be up by 6.4 percent in 1998
  • Major concerns: Costs of Labor and Benefits, The Economy, Inflation, Asian Economies, Rising Interest Rates, and the Strong Dollar
  • Purchasers continue to be equally optimistic about the next 12 months as they were in December 1997.

The NAPM Semiannual Economic Forecast is released in May and December of each year by the National Association of Purchasing Management, which is the largest purchasing and supply management research and education organization in the United States. NAPM has more than 40,000 members in the United States and Puerto Rico. The full text version of the NAPM Semiannual Economic Forecast is posted on NAPM's Web site at www.ism.ws following the national release of 11:00 a.m. (eastern time).

In addition to the forecast the Manufacturing NAPM Report On Business® is issued monthly and is considered by many economists to be the most reliable near-term economic barometer available. It is reviewed regularly by top government agencies and economic and business leaders. The report, compiled from responses to questions asked of more than 300 purchasing managers across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies, and prices. The report has been issued by the association since 1931, except during World War II.

The next Manufacturing NAPM Report On Business® featuring the May 1998 data will be released at 10:00 a.m. (eastern time) on Monday, June 1, 1998. NAPM's newest economic report, the Non-Manufacturing NAPM Report On Business®, will debut on Wednesday, June 3, 1998 at 10:00 a.m. (eastern time) and be released the third business day of each month following.



Back to Top