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To: IQBAL LATIF who wrote (19980)	9/5/1998 4:38:00 AM
From: IQBAL LATIF	Respond to of 50167

Purchasing Managers' Survey (August) Modest Uptick Probably Only GM Rebound - Trend Still Looks Softer. Sept. 1, 1998 The Purchasing Mangers' Survey inched up a hair in August to 49.4 from 49.1 in July. The improvement was in three areas that were likely linked to the restart of the GM plants following the strike. Those components were: Production, at 50.3 vs. 49.2; Employment, at 46.9 vs. 44.4; and Inventories, at 45.3 vs 43.7. Unfortunately, none of those components are what we consider the "leading" indicator parts of the report. The New Orders component, which is key to the outlook, continued to decline - at 50.9 vs 53.2 in July. That is the 4th downtick in the last 6 months, and is the lowest reading since March of 1996. It has not yet fallen below 50, which would indicate that more companies reported declining orders than rising orders, but it is getting perilously close. (See top chart.) The New Orders series is probably very high on Mr. Greenspan's radar screen at present. It is moving toward an "ease", but based on past evidence, is not there yet. In 1995, New Orders plunged from 52.4 in April to 43.9 in May - and by July the Fed eased. However, also at that time, the unemployment rate jumped from 5.4% in March of 1995 to 5.7% in April. Finally, by early summer 1995, the 1994 increase in mortgage rates had tanked the housing market. In our view, Mr. Greenspan will not pull the "easing" trigger unless or until: (1) the New Orders series drops well below 50, (2) the unemployment rate moves up to at least 5.0%, or (3) continued financial market turmoil significantly constrains credit availability. The component that is causing havoc within the manufacturing sector, exports, also continued to weaken. Export Orders were 44.1 vs 45.0 in July - which was the fifth straight monthly decline. (See middle chart.) It should be noted that the NAPM survey is a diffusion index - it measures breadth of strength, or, as in this case, weakness. It means the export weakness is spreading to more manufacturing industries. The two components that would signal "tightening" remain very benign. Supplier Deliveries at 50.6 (bottom chart) and Prices Paid at 38.4. Those would argue that the "bias to tighten" could be removed on Sept. 16. David Orr, Chief Capital Markets Economist