11/01 16:04 NAPM a Worrisome Warning on Technology: Caroline Baum (Correct) By Caroline Baum

NAPM a Worrisome Warning on Technology: Caroline Baum (Correct)

(Commentary. Caroline Baum is a columnist for Bloomberg News. The opinions expressed are her own. Corrects pouring to poring in last sentence.)

New York, Nov. 1 (Bloomberg) -- They are fellow travelers on the road of life. Only once before in the last half century have their paths diverged. Will this be the second time?

For 53 years the National Association of Purchasing Management has been compiling its monthly barometer of business activity. With one exception, in 1998, the rule has been: as manufacturing goes, so goes the nation. This truism applied when goods output accounted for almost 50 percent of nominal GDP in 1959 or 38.3 percent in the first three quarters of 2000, according to Mike Niemira, economist at Bank of Tokyo-Mitsubishi.

This is one of those situations where size doesn't matter. Manufacturing is a cyclical industry, which means it's responsive to changes in the economic cycle. Principally those changes are interest rates and exchange rates, which affect exports.

Goods spending is more susceptible to the business cycle than spending on services. In downturns, folks are more apt to spend money on necessities -- taking the kids to the doctor, visiting the accountant at tax time, renewing the car and home insurance -- than on discretionary items, such as a new sport utility vehicle. Demand for goods is cyclical, in other words.

Export Alert

That said, the weakening trend in the NAPM Index, which has been leaking altitude for over a year, can't be ignored. The index fell 1.6 points to 48.3 in October, the third consecutive month of an outright decline in manufacturing activity (a reading of 50 is the dividing line between expansion and contraction). New orders, the stuff of which future production is made, slipped 1.1 point to 48. It was the fourth monthly reading below 50.

There was a new wrinkle in today's report: the index of export orders fell 2 points to 48.3, the first sub-50 reading since January 1999.

``The big issue this month is exports,'' says Norbert Ore, chair of the NAPM Business Survey Committee and vice president, purchasing and strategic alliances, Chesapeake Display and Packaging Company. ``In only 15 months since the inception of the export index in 1988 has it been below 50, and 13 of them were from January 1998 through January 1999, following the Asian financial crisis.''

That coincided with the one instance in five decades that the signals from NAPM Index and GDP growth diverged for an extended period of time.

Asian Outlier

``In a normal business cycle, the NAPM tracks GDP and does it well,'' Ore says. ``With the Asian financial crisis, there was no history and no historical relationship to that kind of external event.''

To be sure, there is no sign from the merchandise trade report to indicate that U.S. goods exports are slowing. Exports took a dive following Asia's collapse but have recovered from a 5.5 percent year-over-year decline in February 1999 to a 16.4 percent increase in August.

Given the lag with which the trade data are compiled and released, waiting for a signal from them is useless. At a time when Japan is still depressed, Asia is witnessing a reappearance of financial stresses, and Europe is slowing in response to the cumulative 225 basis-point rate increase in the last year, the NAPM export orders index may be an early sign of softening overseas demand.

Only seven of the 20 industries surveyed reported improved business last month. More worrisome, only one of the three high- tech industries in the survey, electronic components and equipment, was among those reporting increased activity for the second month in a row. The PMI for electronic components and equipment (semi-conductors) was 50.8 in October compared to the 70- to-75 range six months ago, according to Ore.

Two Down

The other two high-technology industries -- industrial and commercial equipment and components, and instruments and photographic equipment -- are no longer expanding, according to the NAPM data. The PMI for the former was 42 in October, compared with a level of 56 to 58 six months ago, and 45.3 for the latter, compared with the low 60s a half-year ago.

The NAPM does not release diffusion indexes for each industry because in some months the responses may not be broad-based enough to accurately reflect the trend. (Of a survey panel of 400 companies, about 70 percent respond each month, according to Ore.) But Ore was comfortable with the latest results.

``It's an indication that high-tech isn't growing as strongly as everybody thinks,'' Ore says.

Excluding technology equipment, manufacturing production fell an annualized 2.1 percent in the third quarter and has shown no growth since the end of last year. This is the sector that has become synonymous with the U.S. economy, not to mention responsible for the growth in productivity.

`R' Word

``I think we've entered a growth recession,'' Niemira says. A growth recession is defined as anything below trend.

Federal Reserve Chairman Alan Greenspan is known to be particularly fond of manufacturing data. Former staffers swear he maintains his own set of proprietary indicators, various ratios comparing one manufacturing series to another.

Sustained moves below 50 in the NAPM Index have coincided with a lowering of the federal funds rate, at least during Greenspan's 13-year tenure at the Fed. While policy-makers are struggling to determine what exactly potential economic growth is and some are fretting about inflation risks, I suspect the guy at the helm is poring over his ratios and reconsidering the direction of the next policy move.

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-- Carl Jenkins (somewherepress@aol.com), November 02, 2000