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To: Softechie who wrote (1388)	6/7/2001 12:33:24 AM
From: Softechie	Respond to of 2155

DJ BIG PICTURE: Inventory Problems Lurk In Factory Data 06 Jun 15:49 By John McAuley Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--For those paying as much attention as the Federal Reserve is to the current inventory adjustment process that could easily dictate whether the U.S. avoids a recession or not, recent factory data has a gloomy story to tell. Whereas the Federal Open Market Committee has sounded an upbeat theme on the topic - its latest policy statement said a "significant reduction in excess inventories seems well advanced" - Tuesday's report on manufacturers' shipments, inventories, and orders in April reenforce the impression that the process has a ways to go. In fact it underscores the overall weak state of the manufacturing sector and suggests a decline in May industrial production in particular. It had been hoped that the manufacturing sector's steep drop in activity that began in the fourth quarter would have undergone a swift reversal by now because businesses would have let the inventories that piled up at the end of the year run down far enough to set the foundation for a new round of production. The speedier that correction process, the greater the likelihood that the services sector could avoid suffering a spillover effect. That's why it's important to look beneath this week's news of a 0.1% increase in manufacturing inventories in April, after outright declines of 0.2% in February and 0.8% in March. What's worrisome about it, is not so much the headline number as the details of where the stock buildup took place. When broken down by stage of processing, manufacturing inventories of materials and supplies actually fell by 0.3%, inventories of work-in-process were unchanged, but inventories of finished goods rose by 0.5%. "Broadly speaking, those trends suggest weak production," said Jim O'Sullivan, economist at UBS Warburg. O'Sullivan has not formalized his forecast for industrial production in May, but said "I'm looking for a decline of 0.7% or 0.8% and we have been looking for a 0.5% annual rate of GDP decline in the second quarter." The fact that inventories of work in process were unchanged suggests that there was a lull in ongoing production, while the jump in finished goods inventories suggested there were scant reasons for even that much production. There's little need to ramp up production when you've got an oversupply of finished goods. And to make matters worse, these problems are popping up in previously strong industries. "The inventory/sales ratio for high tech (computers and electronic products) jumped from 1.41 months supply in February and March to 1.51 in April," said O'Sullivan. Production in this industry rose by 55.3% in 2000, but slipped at a 4.3% annual rate in the first quarter and by 1.0% in April. "There's no sign of a turnaround yet," said O'Sullivan. That statement echoed one by Federal Reserve Governor Laurence Meyer, who stated in a speech in New York Wednesday that "there are no signs yet that the economy is strengthening relative to its first quarter performance and growth is likely to remain sluggish into the third quarter." High Tech Is Different Conditions in the high tech industry differ from the so-called "old economy" in many ways, including the way in which it responds to excess inventories. To get a sense of scale, high tech inventories - at $59.6 billion - represent more than 12% of total factory inventories. However, "unlike other industries, the excess in high tech doesn't have to be totally reduced before new production is started," said Henry Willmore, chief U.S. economist at Barclays in New York. The problem for high tech companies is that their products become obsolete so quickly that there's no use keeping old inventories in stock. What results are large-scale write-offs - for example, Cisco Systems Inc. (CSCO) wrote off $2.2 billion of excess inventories in its now-completed fiscal third quarter. That's a costly charge for such companies to incur, and if there's no guarantee that demand in the wider economy will pick up, there's less incentive to restart the production process. Other manufacturing indicators don't auger well, either. While total payroll employment has averaged a 45,000 monthly increase over the past year, factory payrolls have averaged a 51,000 monthly decline over the same period. In fact, factory jobs were cut by 124,000 in May alone. Moreover, the factory workweek was shortened by 12 minutes in May, so total hours worked in manufacturing - a broad measure of both the extent and intensity of labor input - declined by 1.5% in the month of May and by 6.9% in the year to May. That's one reason why Barclays' Willmore believes that "conditions in the manufacturing sector are as bad right now as they have been in most past recessions." Next up is the industrial production data for May, set for release on June 15, which along with payroll employment is used as an important coincident indicator of the cyclical state of economic activity. Given that we already know that payroll employment declined for a second straight month in May, at least one noted analyst is already forecasting the worst. "These two key coincident indicators are already signaling that we are in a recession," said Anirvan Banerji, research director at the Economic Cycle Research Institute. -By John McAuley, Dow Jones Newswires, 201-938-4425; john.mcauley@dowjones.com (END) DOW JONES NEWS 06-06-01 03:49 PM