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December 1998 Manufacturing NAPM Report On Business®

FOR RELEASE: January 4, 1999

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

MANUFACTURING ACTIVITY CONTINUES TO SLOW IN DECEMBER SAY PURCHASING EXECUTIVES IN LATEST MANUFACTURING NAPM REPORT ON BUSINESS®

DO NOT CONFUSE THIS NATIONAL REPORT with the various regional purchasing reports released across the country. The national report's information reflects the entire United States, while the regional reports cover only their local vicinity. Also, the information in the regional reports is not used in calculating the results of the national report. The information compiled in this report is for the month of December 1998.

Purchasing Managers' Index (PMI) at 45.1%
Production, New Orders, Employment and Prices Decline

(Tempe, Arizona) — Economic activity in the manufacturing sector continued to slow in December when compared to November. The overall economy continued to grow in December for the 92nd consecutive month say the nation's purchasing executives in the latest Manufacturing NAPM Report On Business®

The report was issued today by Norbert J. Ore, C.P.M., chair of the National Association of Purchasing Management's Manufacturing Business Survey Committee and director, corporate purchasing, Chesapeake Corporation. "The manufacturing sector continued to contract in December. This is the seventh month of decline. Both production and the new orders declined, signaling that the manufacturing sector is obviously struggling."

The Backlog of Orders Index declined at a faster rate while the Supplier Deliveries Index indicated faster deliveries for the first time in twenty-two months. Manufacturing Employment declined in December for the seventh month. NAPM's Price Index continues to decline and at a faster rate. Exports and Imports failed to grow. Purchasers continue to express concerns with regard to export markets, and they note the softness in the steel industry with the nature of their comments dependent upon whether their organization is a steel buyer or seller.

NAPM's Purchasing Managers' Index was slightly lower at 45.1 percent in December. NAPM's Production Index decreased 2.1 percentage points from 48.6 percent in November to 46.5 percent in December. NAPM's New Orders Index rose 0.5 percentage point from 45.5 percent in November to 46.0 percent in December. NAPM's Backlog of Orders Index registered 37.0 percent indicating smaller backlogs when compared to 40.5 percent in November.

NAPM's Supplier Deliveries Index reversed direction and indicated faster deliveries in December as the index fell to 48.5 percent, down from 50.2. The NAPM Employment Index declined with an index of 40.8 percent down from 44.9 percent in November. NAPM's Price Index in December is 31.3 percent continuing a trend of deceleration that started in January of this year.

NAPM's Inventories Index showed continued inventory liquidation at a faster rate than in November. NAPM's Inventories Index decreased to 41.8 percent from 44.9 percent in November. Responding to a special monthly question concerning customers' inventories of products purchased from the purchasers' organizations, 14 percent of the purchasing executives felt they were too high (up from 12 percent in November). On the other hand, 20 percent felt they were too low (up from 17 percent in November) and 66 percent thought they were about right (down from 71 percent in November).

NAPM's New Export Orders Index continued to contract in December, however, at a slower rate, increasing 2.6 percentage points to 45.5 percent. Imports of materials by manufacturers decreased in December, at a slightly slower rate, as NAPM's Imports Index was up 0.6 percentage points to 49.8 percent from 49.2 percent in November.

"The overall picture as we close 1998 is one of faster decline in manufacturing activity," added Ore. "New Orders continue weak as we proceed into 1999 and prompt concerns about the manufacturing sector as we move into the first quarter. Deliveries of commodities are faster and consistent with the decline in order backlogs. Commodities appear to be in ample supply as only one item appears on the short supply list."

Of the 20 industries in the manufacturing sector, three reported improved business in December. Industries that reported improvement over November were (listed in order): Food; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); and Printing & Publishing.

"Castings are the only commodity listed in short supply. Natural Gas was the only commodity reported up in price. Commodities with reports of price decreases include Aluminum, Bearings, Caustic Soda, Copper, Corrugated Containers, Gasoline, Linerboard, Natural Gas, Oil, Polyethylene, Polyethylene (HDPE), Polyethylene Resins, Polypropylene, Resins, Steel, Steel Sheets, and Titanium Dioxide," Ore stated.

DECEMBER 1998 NAPM BUSINESS SURVEY AT A GLANCE
Series December Index Direction Dec vs Nov Rate of Change Dec vs Nov
PMI 45.1 Contracting Faster
Production 46.5 Contracting Faster
New Orders 46.0 Contracting Slower
Backlog of Orders 37.0 Contracting Faster
Supplier Deliveries 48.5 Faster From Slower
Inventories 41.8 Contracting Faster
Employment 40.8 Contracting Faster
Prices 31.3 Decreasing Faster
New Export Orders 45.5 Contracting Slower
Imports 49.8 Contracting Slower

THE ECONOMY AT A GLANCE
Overall Economy Growing Slower
Manufacturing Contracting Faster

Purchasing Managers' Index (PMI)

The Purchasing Managers' Index (PMI) indicates that the manufacturing economy contracted at a faster rate in December with the index of 45.1 percent. This is 1.7 percentage points lower when compared to November. This the seventh consecutive month that the manufacturing sector has failed to grow. This is also the lowest reading for the PMI since May 1991. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 43.5 percent, over a period of time, generally indicates an expansion of the overall economy. Ore added, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (50.2 percent), corresponds to a 2.3 percent increase in real gross domestic product (GDP). The PMI for December (45.1 percent) corresponds to a 0.5 percent increase in real GDP if December's reading is projected on an annual basis."

Month Dec'98 Nov'98 Oct'98 Sep'98 Aug'98
PMI% 45.1 46.8 48.3 49.4 49.4
Month Jul'98 Jun'98 May'98 Apr'98 Mar'98
PMI% 49.1 49.6 51.4 52.9 54.8
Month Feb'98 Jan'98 Dec'97 Nov'97 Oct'97
PMI% 53.3 52.4 53.1 54.5 55.9

Production

NAPM's Production Index contracted for the second consecutive month indicating a faster rate of decline in manufacturer's production for the month. NAPM's Production Index in December is 46.5 percent, a 2.1 percentage points decrease when compared to the November index of 48.6 percent.

An index above 49.8 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Industries showing the highest rate of growth in production for December were (listed in order): Industrial & Commercial Equipment & Computers; Printing & Publishing; and Food.

Production %Better %Same %Worse Net Index
December 1998 18 54 28 -10 46.5
November 1998 22 54 24 -2 48.6
October 1998 22 61 17 +5 52.6
September 1998 24 57 19 +5 53.4

New Orders

NAPM's New Orders Index rose slightly to 46.0 percent in December, an increase of 0.5 percentage point. A New Orders Index above 50.7 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 1987 dollars).

For the month of December, five industries reported higher rates of increase in new orders. They were (listed in order): Food; Miscellaneous (a preponderance of jewelry, toys, sporting goods,

musical instruments); Glass, Stone & Aggregate; Printing & Publishing; and Rubber & Plastic Products.

New Orders %Better %Same %Worse Net Index
December 1998 20 47 33 -13 46.0
November 1998 19 53 28 -9 45.5
October 1998 21 51 28 -7 45.7
September 1998 26 49 25 +1 50.1

Backlog of Orders

NAPM's Backlog of Orders Index (not seasonally adjusted) failed to grow in December. When compared to November, the decline in the order backlog was at a faster rate. The index recorded 37.0 percent, 3.5 percentage points lower than November, and indicating a smaller backlog of orders for the month of December when compared to November. The only industry that reported a greater rate of increase in backlog of orders was Glass, Stone & Aggregate.

Backlog of Orders %Reporting %Greater %Same %Less Net Index
December 1998 90 11 52 37 -26 37.0
November 1998 90 13 55 32 -19 40.5
October 1998 89 19 53 28 -9 45.5
September 1998 90 19 54 27 -8 46.0

Supplier Deliveries

NAPM's Supplier Deliveries Index in December indicates delivery performance is faster when compared to November with an index reading of 48.5 percent after twenty-two consecutive months of reporting slower or unchanged. The industries reporting slower supplier deliveries in December were: Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); and Textiles.

Supplier Deliveries %Slower %Same %Faster Net Index
December 1988 4 88 8 -4 48.5
November 1998 6 90 4 +2 50.2
October 1998 6 88 6 0 50.0
September 1998 6 91 3 +3 51.5

NOTE: A list of commodities in short supply is available at the end of this report.

Inventories

Manufacturers' inventory activity in December indicated a faster rate of reduction than reported in November. NAPM's Inventories Index for December declined to 41.8 percent from 44.9 percent in November. This continues a long-term trend of inventory reduction by manufacturers. An Inventories Index over 41.5 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (constant 1987 dollars). The industries reporting higher inventories in December over November were: Wood & Wood Products; Printing & Publishing; and Food.

Inventories %Higher %Same %Lower Net Index
December 1998 12 60 28 -16 41.8
November 1998 11 63 26 -15 44.9
October 1998 14 66 20 -6 49.8
September 1998 14 60 26 -12 42.3

Employment

Manufacturing employment contracted at a faster rate in December, as the index declined to 40.8 percent from 44.9 percent in November. The December index is 4.1 percentage points lower than November. This is the seventh consecutive month that the index has shown a decline in manufacturing employment.

An Employment Index above 47.0 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. None of the twenty manufacturing SIC codes reported growth in employment.

Employment %Higher %Same %Lower Net Index
December 1998 9 62 29 -20 40.8
November 1998 11 68 21 -10 44.9
October 1998 13 63 24 -11 45.0
September 1998 15 60 25 -10 45.5

Prices

NAPM's Price Index continued to decline in December, but at a faster rate. The Price Index fell to 31.3 percent from 35.0 percent in November. This index indicates lower prices paid by manufacturers for the twelfth consecutive month. In December, one percent of purchasing executives reported paying higher prices, 40 percent reported paying lower prices, while 59 percent reported that prices were unchanged from the preceding month.

A Price Index below 46.7 percent, over time, is generally consistent with a decrease in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. None of the twenty manufacturing SIC codes reported growth in prices.

Prices %Higher %Same %Lower Net Index
December 1998 1 59 40 -39 31.3
November 1998 2 63 35 -33 35.0
October 1998 6 59 35 -29 35.8
September 1998 6 58 36 -30 34.4

NOTE: A list of commodities up in price and down in price is available at the end of this report.

New Export Orders

NAPM's New Export Orders Index for December failed to indicate growth (an index exceeding 50 percent) marking the twelfth consecutive month that the index has contracted. The New Export Orders Index at 45.5 percentage points indicates that exports are still declining, but at a slower rate than experienced in the previous two months. There were no industries reporting growth in new export orders in December.

New Export Orders %Exporting %Better %Same %Worse Net Index
December 1998 77 9 70 21 -12 45.5
November 1998 79 12 64 24 -12 42.9
October 1998 77 8 68 24 -16 42.0
September 1998 79 10 72 18 -8 45.8

Imports

Imports of materials by manufacturers failed to grow in December, but the rate of decline was not as fast as November. NAPM's Imports Index increased 0.6 percentage point to 49.8 percent in December, from 49.2 percent in November. The six industries reporting growth in import activity for December were: Textiles; Fabricated Metals; Food; Instruments & Photographic Equipment; Electronic Components & Equipment; and Industrial & Commercial Equipment & Computers.

Imports %Importing %Higher %Same %Lower Net Index
December 1998 75 12 76 12 0 49.8
November 1998 76 11 77 12 -1 49.2
October 1998 76 14 75 11 +3 51.2
September 1998 77 15 75 10 +5 53.1

Buying Policy

Average commitment leadtime for Capital Expenditures rose to 127 days in December. Average leadtime for Production Materials is 49 days, up 3 days from November. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies remained the same at 24 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures
December 1998 13 9 14 22 31 11 127
November 1998 14 9 12 26 31 8 119
October 1998 13 8 16 21 36 6 118
September 1998 13 8 14 23 34 8 122
Production Materials
December 1998 23 34 26 12 4 1 49
November 1998 22 43 21 9 4 1 46
October 1998 26 40 21 9 2 2 45
September 1998 23 44 23 8 1 1 41
MRO Supplies
December 1998 45 42 9 4 0 0 24
November 1998 46 42 10 1 1 0 24
October 1998 50 37 10 3 0 0 22
September 1998 52 34 13 1 0 0 22

In Short Supply

Castings.

Up in Price

Natural Gas (also shown down in price).

Down in Price

Aluminum — 14th month; Caustic Soda — 3rd month; Copper - 18th month; Corrugated Containers — 6th month; Gasoline; Linerboard — 2nd month; Methanol; Natural Gas (also shown up in price); Oil; Polyethylene (HDPE) — 8th month; Polyethylene; Polyethylene Resins; Polypropylene; Resins — 6th month; Steel — 6th month; Steel Sheets; and Titanium Dioxide (used as a whitener in coatings, paints, paper).

Data and Method of Presentation

The Manufacturing NAPM Report On Business® is based on data compiled from monthly replies to questions asked of purchasing executives in over 350 industrial companies. Membership of the Business Survey Committee is diversified by Standard Industrial Classification (SIC) category, based on each industry's contribution to Gross Domestic Product (GDP). Twenty industries from various U.S. geographical areas are represented on the committee.

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Employment, and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher, better, and slower for Supplier Deliveries) and the negative economic direction (lower, worse, and faster for Supplier Deliveries), and the diffusion index. Responses are raw data and are never changed. The diffusion index includes the percent of positive responses plus one-half of those responding the same (considered positive).

The resulting single index number is then seasonally adjusted to allow for the effects of repetitive intrayear variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to nonmoveable holidays. All seasonal adjustment factors are supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them. The PMI is a composite index based on the seasonally adjusted diffusion indices for five of the indicators (New Orders, Production, Supplier Deliveries, Inventories, and Employment) with varying weights.

Diffusion indices have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent that it is generally declining. A PMI over 43.6 percent, over a period of time, indicates that the overall economy, or Gross Domestic Product (GDP), is generally expanding, below 43.6 percent, that it is generally declining. The distance from 50 percent or 43.6 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, NAPM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

Responses to Buying Policy reflect the percent reporting the current month's leadtime, the approximate weighted number of days ahead for which commitments are made for Production Materials, Capital Expenditures, and Maintenance, Repair, and Operating (MRO) Supplies, expressed as hand-to-mouth (five days), 30 days, 60 days, 90 days, six months (180 days), a year or more (360 days), and the weighted average number of days. These responses are raw data, never revised, and not seasonally adjusted since there is no significant seasonal pattern.

The Manufacturing NAPM Report On Business® is published monthly by the National Association of Purchasing Management, the largest purchasing and supply management research and education organization in the United States. NAPM is comprised of 180 affiliates with more than 43,000 members in the United States and Puerto Rico. The report has been issued by the association since 1931.

The full text version of the Manufacturing NAPM Report On Business® is posted on NAPM's Web site at www.ism.ws on the first business day of every month after 10:10 a.m. (EST).

The next Manufacturing NAPM Report On Business® featuring the January 1999 data will be released at 10:00 a.m. (EST) on February 1, 1999.

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