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Manufacturers Getting Busier, Report Finds : Economy: Study of 80 purchasing managers indicates greater confidence in economic climate, despite recent bad news.

October 25, 1994|JOHN O'DELL | TIMES STAFF WRITER

ORANGE — Manufacturers in Orange County had one of their best post-recession quarters in the July-September period with increased productivity and a decline in layoffs, according to a report issued Monday.

The good news, from Chapman University's quarterly purchasing manager survey, comes at a time when a number of negative economic signals have sounded.

Unemployment for September rose slightly to 6% from 5.9% in August, largely because of computer manufacturing declines, and two major companies--GM-Hughes Electronics and AST Research--have said they will shutter Orange County facilities over the next year. Closures of Hughes' Fullerton research and manufacturing campus and AST's Fountain Valley computer factory will remove more than 6,000 jobs from the county.

Despite those somber notes, manufacturing industry executives who participated in the Chapman University survey said that they think the climate for manufacturing over the next six months and beyond is fairly positive.

"From what I saw in the written comments, they expect things to be just as good in the next two quarters," said Raymond Sfeir, the Chapman economist who designed and conducts the survey for the private school's Center for Economic Research. "I don't think the AST and Hughes situations can turn things back in the county or the state."

Sfeir's index of the Orange County manufacturing industry's confidence in the economy is based on responses from purchasing managers at 80 companies that make computer and electronics equipment, industrial machinery, medical equipment and consumer goods.

Purchasing managers are questioned because they are on the front line, responsible for knowing where the economy is heading, ordering the factories' materials and planning production levels to meet rising or shrinking demands.

The survey measures changes in local manufacturing production, inventories, new orders and the purchases and prices of raw materials, as well as the speed with which suppliers deliver raw materials.

Readings above 50 show degrees of growth while those below 50 measure contraction in the industry during the quarter.

For the third quarter, Sfeir reported an index of 61.2, up from 58.6 in the second quarter. It is only the fourth time since the survey began in 1988--and the second time since the recession of 1990-91--that the index has topped 61. Most recently, Sfeir reported a 61.9 measurement for the fourth quarter of 1993.

While the rating has bounced up and down since the recession began in July, 1990, Sfeir said that he is heartened because the index has not dipped below 50 for four consecutive quarters.

That manufacturers reported much slower delivery of raw materials in the third quarter was a major factor in the index growth for that period, Sfeir said.

It usually is good news for the economy when such deliveries slow down, because it means the suppliers are busy and can't respond as quickly as when the economy is weaker and their trucks are idle due to a lack of orders.

The third quarter survey showed that 35.8% of the respondents reported slower deliveries, up from 29% in the second quarter.

One other significant factor in the third-quarter growth, Sfeir said, was rising commodity prices. Almost 59% of the purchasing managers said they had to pay more for raw material than in the second quarter.

"That means demand is up," Sfeir said. On the negative side, it also means that prices of finished goods are likely to rise to help cover the higher prices of raw materials, and that feeds inflation.

Purchasing managers also said that inventories of raw materials were shrinking as production levels firmed up--only 20.9% reported production dropping while 27.8% said it stayed the same and 51.3% said levels grew. In the second quarter, 22.3% said production shrank and 20.4% said levels were unchanged.

As new orders rose and inventories dropped, 46.2% of Orange County's manufacturers stepped up purchases of raw materials, compared to 43.5% in the second quarter.

Beginning this year, Sfeir has been charting employment changes at manufacturing companies and for the third quarter said that 19.8% of the companies reported declining employment, compared with 25.7% in the second quarter.

The employment statistics are not being used yet to help compile the overall index of economic confidence, because at least a full year of comparison is needed, Sfeir said.

Employment continued to fall in the high-technology industries surveyed, particularly those affected by federal defense spending cuts, and price wars and supply shortages in the computer industry, Sfeir said.

Otherwise, employment levels largely remained unchanged.

The state Employment Development Department reported last week that Orange County manufacturing businesses employed 206,100 workers in September, down less than 1% from 207,900 in September, 1993.

In September, 1990, a month after the recession began, manufacturers in Orange County employed 257,300 workers--and that was down from 259,400 the previous year.

Better Business

Orange County's manufacturing industries as a whole showed marked gains in Chapman University's Purchasing managers Composite Index. The index gauges industry activity and managers' confidence in the economy. A level of 50 or more indicates growth; less than 50, decline. Third-quarter figures: 1994 61.2.

Source: Chapman University

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