The California Purchasing Managers Index, released July 21 by the Anderson Center for Economic Research at Chapman University, decreased marginally from 50.5 in the first quarter of 2008 to 50.3 in the second quarter, indicating very little growth in this sector. At the same time, commodity prices paid by manufacturers reached their highest level since the survey started in 2002. The employment index decreased from 48.3 to 44.6, indicating decline in manufacturing jobs in the second quarter. At the national level, the manufacturing index registered an average of 49.5 for the quarter, indicating contraction in the national manufacturing sector.
The non-durable goods industries showed a decrease in activity in the second quarter. Were it not for the growth in the high-tech and other durable goods industries, the composite index would have been in contraction territory.
Performance by industry group
The index for the non-durable goods industries decreased from 50.3 to 46.7 indicating that these industries contracted in the second quarter of 2008. Production grew slightly, but new orders decreased in the second quarter. The commodity price index decreased from 92.4 to 86.9, indicating still a high increase in commodity prices. The employment index decreased sharply from 49.8 to 36.6 indicating a large decrease in employment in these industries.
The index for the durable goods industries other than high-tech rebounded from 43.8 to 51.0, indicating slow growth in the second quarter. Production and new orders grew in the second quarter. The price index reached 90.9, the highest level since the survey began in 2002.
The high-tech industries continued to grow for the 20th consecutive quarter. Production, new orders and employment all grew in the second quarter. Commodity prices also increased in the second quarter at a faster rate than in the first quarter as the index increased from 73.3 to 84.2.
Growth rate of the underlying variables
For the manufacturing sector as a whole, production grew but new orders were practically unchanged compared to the first quarter of 2008. The commodity price index increased again from 85.2 to 87.8 the highest value since the survey began in 2002. This indicates that commodity prices increased at a higher rate in the second quarter. Manufacturers held fewer inventories of purchased materials as the index decreased to 48.6. The employment index also dipped below 50, indicating a decrease in hiring activity.
• Production was reported to have increased most rapidly in the following industries: Food; Leather & Allied Products; Printing & Related Support Activity; Chemicals; Plastics & Rubber Products; Wood Products; Primary Metals; Fabricated Metal Products; Machinery; Electrical Equipment, Appliance & Components; Transportation Equipment; Miscellaneous; Computer & Electronic Products; and Aerospace Products & Parts. Production was reported to have decreased most rapidly in the following industries: Textile Mill Products; Apparel; Paper; Non-metallic Mineral Products; and Furniture & Related Products.
• All industries reported higher commodity prices.
• New orders were reported to have increased most rapidly in the following industries: Food; Chemicals; Wood Products; Non-metallic Mineral Products; Machinery; Electrical Equipment, Appliance & Components; Miscellaneous; Computer & Electronic Products; and Aerospace Products & Parts. New orders were reported to have decreased most rapidly in the following industries: Apparel; Fabricated Metal Products; and Furniture & Related Products.
• Employment was reported to have increased most rapidly in the following industries: Non-metallic Mineral Products; Fabricated Metal Products; Computer & Electronic Products; and Aerospace Products & Parts. Employment was reported to have decreased most rapidly in the following industries: Textile Mill Products; Apparel; Leather & Allied Products; Paper; Printing & Related Support Activities; Plastics & Rubber Products; Machinery; Electrical Equipment, Appliance & Components; and Furniture & Related Products.
Comments made by purchasing managers
• “Raw material prices continue to climb and we are successful at passing on MOST cost to our customers.” (Food)
• “Lumber prices are significantly off. Most are at 20-year lows.” (Wood Products)
• “Although our sales are up over the previous quarter, they are down from the same quarter last year. Due to this decline, we are not replacing lost personnel, and we are paring down floor inventory levels.” (Printing & Related Support Activities)
• “The cost of the Euro has drastically impacted business.” (Chemicals)
• “The cost of plastics is rising just like the cost of gasoline. So it is making it very difficult to stay competitive and to retain business. We are seeing more and more material/commodities diverted to China.” (Plastics & Rubber Products)
• “Fuel prices affect our production cost and our delivery cost. We are not in a position to give our employees any raises. We are seeing an increase in orders and are hoping to see improvement in the third quarter.” (Non-metallic Mineral Products)
• “The spiraling steel prices along with the fallout from the credits problems facing the financial institutions has led to a tightening of qualifications for commercial lending. This, in turn, has caused major projects to be pushed back or postponed altogether. As a result, work that was slated to be under way in Quarter 1 and Quarter 2 has not materialized resulting in unanticipated lower sales.” (Primary Metals)
• “Our backlog has leveled off. Our production schedule has shortened. Our lead times have come down. Steel, fuel and other commodities are on the rise and have forced us to increase prices. Sales have generally slowed.” (Fabricated Metal Products)
• “Some of our vendors have gone to price adjustments twice a year where previously they were only once a year. We have also seen a drastic increase in surcharges. Both are just ways our suppliers are covering more of their costs and are making it harder and harder to compete in today’s marketplace.” (Machinery)
• “Third-quarter bookings look softer, so we anticipate a slowdown for the second half of 2008. Fuel prices, energy costs and chemicals are up in price. When you deal in long-term contracts with your customers, it can be very difficult to cover these increases. Running inventories very lean. Current slow payment by our corporate offices, as well as from customers, has slowed or impeded procurement of materials. This has resulted in late deliveries and loss of orders.” (Computer & Electronic Products)
• “Orders for military power supplies remain strong. Commercial orders remain strong but there are delays in delivery schedule requirements. Business is very strong. Building up inventory.” (Electrical Equipment, Appliance & Components)
• “Continued slight upward trend based on strong aerospace business in commercial and military segments. CEV/Space Shuttle business is picking up over the next few years with the replacement of the shuttles and the current mission to go to the moon and beyond with a new generation shuttle. Satellite business is growing and so is support to our Navy customer.” (Aerospace Products & Parts)
• “Fuel prices and heightened port security are driving our costs up. We are seeing the effect of the China furniture industry.” (Furniture & Related Products)
Performance of the national manufacturing sector
Nationally, the Purchasing Managers Index, published by the Institute for Supply Management, decreased from an average of 49.2 in the first quarter of 2008 to 49.5 in the second quarter, indicating that the manufacturing economy contracted in the second quarter of this year. The production index increased from 51.2 in the month of May to 51.5 in the month of June, indicating that production increased in the month of June. Not faring as well, the new orders index fell from 49.7 to 49.6, indicating that new orders fell in June at approximately the same rate as in May. The employment index decreased from 45.5 in May to 43.7 in June, indicating that employment decreased at a faster rate in June. The commodity price index increased substantially from 87.0 in May to 91.5 in June, indicating that commodity prices increased at a higher rate in June. The supplier deliveries index increased from 53.7 in May to 55.1 in June, indicating that supplier deliveries were slower in June.
Background and methodology
The Institute for Supply Management conducts a monthly national survey of purchasing managers and publishes the survey results in its Report on Business. Such a survey is not available for the state of California. Given the size of California, and the major role its manufacturing sector plays in the national economy, the A. Gary Anderson Center for Economic Research at Chapman University launched a quarterly survey of California purchasing managers starting in the third quarter of 2002.
The survey tracks changes in production, employment, new orders, inventories of purchased materials, commodity prices and supplier deliveries. Except for commodity prices, a seasonally adjusted index is computed for each variable.
In order to have one single indicator for the performance of the state manufacturing sector, the Anderson Center has developed a Composite Index that is a weighted average of the underlying indices. A value of 50 for the Composite Index shows a general expansion of the manufacturing economy of the state and a value below 50 shows a decline. The industries are classified according to the North American Industry Classification System (NAICS).
Detailed results of the survey of purchasing managers of California for Q2 2008
In its attempt to present you with a better delivery of the survey results, the A. Gary Anderson Center for Economic Research has calculated an index for every variable in the survey. The "% Better," is added to half of the "% Same," after which a seasonal factor is used to get a seasonally adjusted index for each variable. A value greater than 50 for an index indicates growth and a value less than 50 indicates a decline. Each industry in the manufacturing sector is represented in the survey based on its employment share of the total manufacturing economy of the state.
Production: The seasonally adjusted index for production increased from 49.7 in the first quarter of 2008 to 52.8 in the second quarter, indicating that production increased in the second quarter of this year. Production was reported to have increased most rapidly in the following industries: Food; Leather & Allied Products; Printing & Related Support Activity; Chemicals; Plastics & Rubber Products; Wood Products; Primary Metals; Fabricated Metal Products; Machinery; Electrical Equipment, Appliance & Components; Transportation Equipment; Miscellaneous; Computer & Electronic Products; and Aerospace Products & Parts. Production was reported to have decreased most rapidly in the following industries: Textile Mill Products; Apparel; Paper; Non-metallic Mineral Products; and Furniture & Related Products.
Inventories of Purchased Materials: The seasonally adjusted index for inventories of purchased materials decreased from 49.7 in the first quarter of 2008 to 48.6 in the second quarter, indicating that inventories of purchased materials decreased in the second quarter at a faster rate compared to the first quarter. Inventories of purchased materials were reported to have increased most rapidly in the following industries: Fabricated Metal Products; and Machinery. Inventories of purchased materials decreased most rapidly in the following industries: Apparel; Transportation Equipment; and Computer & Electronic Products.
Commodity Prices: The seasonally unadjusted index for commodity prices increased from 85.2 in the first quarter of 2008 to 87.8 in the second quarter, indicating that commodity prices rose faster in the second quarter compared to the first quarter. All industries reported higher commodity prices.
Supplier Deliveries: For this variable, an index value over 50 indicates slower deliveries, and an index value under 50 indicates faster deliveries. The seasonally adjusted index for supplier deliveries decreased from 56.5 in the first quarter of 2008 to 55.1 in the second quarter, indicating that supplier deliveries were slower in the second quarter. Supplier deliveries were reported to have slowed most rapidly in the following industries: Food; Chemicals; Plastics & Rubber Products; Non-metallic Mineral Products; Fabricated Metal Products; Machinery; Electrical Equipment, Appliance & Components; Transportation Equipment; and Miscellaneous. The Printing & Related Support Activity industry reported faster supplier deliveries.
New Orders: The seasonally adjusted index for new orders increased from 50.0 in the first quarter of 2008 to 50.3 in the second quarter, indicating that new orders increased slightly in the second quarter. New orders were reported to have increased most rapidly in the following industries: Food; Chemicals; Wood Products; Non-metallic Mineral Products; Machinery; Electrical Equipment, Appliance & Components; Miscellaneous; Computer & Electronic Products; and Aerospace Products & Parts. New orders were reported to have decreased most rapidly in the following industries: Apparel; Fabricated Metal Products; and Furniture & Related Products.
Employment: The seasonally adjusted index for employment decreased from 48.3 in the first quarter of 2008 to 44.6 in the second quarter, indicating that employment in manufacturing decreased in the second quarter at a faster rate compared to the first quarter of this year. Employment was reported to have increased most rapidly in the following industries: Non-metallic Mineral Products; Fabricated Metal Products; Computer & Electronic Products; and Aerospace Products & Parts. Employment was reported to have decreased most rapidly in the following industries: Textile Mill Products; Apparel; Leather & Allied Products; Paper; Printing & Related Support Activities; Plastics & Rubber Products; Machinery; Electrical Equipment, Appliance & Components; and Furniture & Related Products.
High-Tech Industries: The high-tech industries include the following: Computer & Electronic Products, and Aerospace Products & Parts. The high-tech industries currently employ about 377,300 employees, amounting to 26.18% of total manufacturing employment in the state. The high-tech index decreased from 62.2 in the first quarter of 2008 to 55.9 in the second quarter, indicating that the high-tech industries grew at a slower rate in the second quarter. Once again, the California manufacturing sector averted a contraction due mostly to the growth that occurred in the high-tech industries. Production increased at a faster rate compared to the first quarter. The commodity price index increased from 73.3 to 84.2 indicating that commodity prices increased at a higher rate in the second quarter. The index for inventories of purchased materials decreased substantially from 59.3 to 50.0 indicating that inventories remained at the same level in the second quarter as they were in the first quarter.
Orange County’s Manufacturing Survey
The Composite Index for Orange County increased from 46.8 in the first quarter of 2008 to 49.1 in the second quarter according to a survey of purchasing managers. This indicates that the manufacturing sector of Orange County contracted for the second consecutive quarter. The Orange County manufacturing sector fared worse than both the California and the national manufacturing sectors.
The seasonally adjusted index for production increased from 48.1 in the first quarter of 2008 to 48.6 in the second quarter, indicating that production decreased in the first quarter but at a slower rate compared to the first quarter. The seasonally unadjusted commodity price index increased from 83.5 in the first quarter of 2008 to 86.0 in the second quarter, indicating that commodity prices increased at a faster rate compared to the first quarter. The seasonally adjusted index for new orders
increased from 40.3 in the first quarter of 2008 to 49.5 in the second quarter indicating that new orders were only slightly lower than they were in the first quarter.
The high-tech industries index registered 50.8, and the index for the durable goods industries other than high-tech registered 51.4. This indicates that both groups of industries grew slightly in the second quarter of 2008. The index for the non-durable goods industries registered 44.9 indicating a contraction for these industries although the decline was not as severe as it was in the first quarter.
About the Anderson Center for Economic Research
The A. Gary Anderson Center for Economic Research (ACER) was established in 1979 to provide data, facilities and support in order to encourage the faculty and students at Chapman University to engage in economic and business. To learn more about the center, visit www.chapman.edu/argyros/asbecenters/acer/Default.asp.
