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December 2005 Manufacturing ISM Report On Business®

FOR RELEASE: January 3, 2006

Contact: Rose Marie Goupil
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
  E-mail: rgoupil@ism.ws
PMI at 54.2%

DO NOT CONFUSE THIS NATIONAL REPORT with the regional purchasing reports released across the country. The national report's information reflects the entire United States, while the regional reports contain primarily regional data from their local vicinities. Also, the information in the regional reports is not used in calculating the results of the national report. The information compiled in this report is for the month of December 2005.


New Orders, Production Expanding
Employment Growing, Deliveries Slowing
Prices Increasing

(Tempe, Arizona) – Economic activity in the manufacturing sector grew in December for the 31st consecutive month, while the overall economy grew for the 50th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "2005 was an excellent year for the manufacturing sector as measured by the ISM data. In December, we saw a decline in the rate of growth of both new orders and production, but both indexes are at levels that support economic growth. We saw a significant slowing in the upward pricing spiral that has been a source of continuing concern for manufacturers. A strong fourth quarter should carry significant momentum forward into 2006."

TOP PERFORMING INDUSTRIES

The 10 industries reporting growth in December – listed in order – are: Miscellaneous*; Petroleum; Food; Primary Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Instruments & Photographic Equipment; Paper; Rubber & Plastic Products; and Transportation & Equipment.

WHAT RESPONDENTS ARE SAYING ...
  • "Business remains strong into our traditional slow time. This is a big surprise. The reason is the construction economy continues to be strong." (Fabricated Metals)
  • "Sales have improved as a result of impending holidays." (Food)
  • "Steel prices are staying at the fourth-quarter level at least for the first quarter and possibly the first six months of 2006." (Furniture)
  • "Although gas and electricity costs are quite high, we are able to offset these costs by a strong construction market that enables us to maintain a good profit margin." (Primary Metals)
  • "Business continues to remain strong. We are beginning to see a retreat in petroleum-based goods." (Textiles)
MANUFACTURING AT A GLANCE
DECEMBER 2005


Index
Series
Index
December
Series
Index
November
Percentage
Point
Change


Direction
Rate
of
Change

Trend*
(Months)
PMI 54.2 58.1 -3.9 Growing Slower 31
New Orders 55.5 59.8 -4.3 Growing Slower 32
Production 57.0 60.6 -3.6 Growing Slower 32
Employment 52.7 56.6 -3.9 Growing Slower 6
Supplier Deliveries 53.5 58.3 -4.8 Slowing Slower 30
Inventories 47.2 49.3 -2.1 Contracting Faster 9
Customers' Inventories 48.0 43.5 +4.5 Too Low Slower 55
Prices 63.0 74.0 -11.0 Increasing Slower 5
Backlog of Orders 49.5 53.0 -3.5 Contracting From Growing 1
Exports 54.3 59.2 -4.9 Growing Slower 48
Imports 52.8 54.1 -1.3 Growing Slower 49
             
OVERALL ECONOMY Growing Slower 50
Manufacturing Sector Growing Slower 31

*Number of months moving in current direction

COMMODITIES REPORTED UP/DOWN IN PRICE and IN SHORT SUPPLY

Commodities Up in Price

Aluminum (5); Aluminum Products; Caustic Soda (20); Chemicals (23); Copper (7); Copper Products; Corrugated Containers (2); Corrugated Packaging; Energy (11); Freight; Gasoline (6); LDPE (2); Natural Gas (41); Natural Rubber; Oil (8); Packaging; Petroleum Products (2); Plastic Resins (11); Plastics (17); Resins* (6); Rubber (2); and Steel (27).

Commodities Down in Price

Diesel Fuel (2) and Resins*.

Commodities in Short Supply

Caustic Soda (2); Plastics; Resins; and Steel (3).

*Reported as both up and down in price.
Note: The number of consecutive months the commodity is listed is indicated after each item.


DECEMBER 2005 MANUFACTURING INDEX SUMMARIES


PMI

The PMI indicates that the manufacturing economy grew in December for the 31st consecutive month. The PMI for December registered 54.2 percent, a decrease of 3.9 percentage points when compared to November's reading of 58.1 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42.7 percent, over a period of time, generally indicates an expansion of the overall economy. The December PMI indicates that both the overall economy and the manufacturing sector are growing. The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (55.5 percent) corresponds to a 4.6 percent increase in real gross domestic product (GDP) on an annual basis. In addition, if the PMI for December (54.2 percent) is annualized, it corresponds to a 4.2 percent increase in real GDP annually.

THE LAST 12 MONTHS
Month PMI   Month PMI
Dec 2005 54.2   Jun 2005 53.8
Nov 2005 58.1   May 2005 51.4
Oct 2005 59.1   Apr 2005 53.3
Sep 2005 59.4   Mar 2005 55.2
Aug 2005 53.6   Feb 2005 55.3
Jul 2005 56.6   Jan 2005 56.4
Average for 12 months – 55.5
High – 59.4
Low – 51.4

New Orders

ISM's New Orders Index grew in December with a reading of 55.5 percent. The index is 4.3 percentage points lower than the 59.8 percent registered in November, and December is the 32nd consecutive month the index has exceeded 50 percent. A New Orders Index above 51.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars). Ten industries reported increases during December: Petroleum; Miscellaneous*; Instruments & Photographic Equipment; Food; Primary Metals; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Electronic Components & Equipment; Transportation & Equipment; and Furniture.

New
Orders
%
Better
%
Same
%
Worse

Net

Index
Dec 2005 30 50 20 +10 55.5
Nov 2005 30 54 16 +14 59.8
Oct 2005 30 54 16 +14 61.7
Sep 2005 35 53 12 +23 63.8

Production

ISM's Production Index registered 57 percent in December, 3.6 percentage points lower than the 60.6 percent reported in November. December is the 32nd consecutive month of growth in the index. An index above 50 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in December, 10 registered growth: Miscellaneous*; Primary Metals; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Food; Paper; Furniture; Wood & Wood Products; Electronic Components & Equipment; and Rubber & Plastic Products.


Production
%
Better
%
Same
%
Worse

Net

Index
Dec 2005 27 58 15 +12 57.0
Nov 2005 30 59 11 +19 60.6
Oct 2005 31 57 12 +19 62.0
Sep 2005 37 52 11 +26 63.1

Employment

ISM's Employment Index expanded for the sixth consecutive month in December. The index registered 52.7 percent in December compared to 56.6 percent in November, a decrease of 3.9 percentage points. An Employment Index above 48.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The eight industries reporting growth in employment during December are: Electronic Components & Equipment; Miscellaneous*; Food; Industrial & Commercial Equipment & Computers; Primary Metals; Paper; Fabricated Metals; and Rubber & Plastic Products.


Employment
%
Higher
%
Same
%
Lower

Net

Index
Dec 2005 12 80 8 +4 52.7
Nov 2005 19 72 9 +10 56.6
Oct 2005 18 69 13 +5 55.0
Sep 2005 19 65 16 +3 53.1

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 30th consecutive month in December. ISM's Supplier Deliveries Index for December registered 53.5 percent, a decrease of 4.8 percentage points when compared to November's reading of 58.3 percent. A reading above 50 percent indicates slower deliveries. The six industries reporting slower supplier deliveries in December are: Wood & Wood Products; Textiles; Fabricated Metals; Transportation & Equipment; Electronic Components & Equipment; and Chemicals.

Supplier
Deliveries
%
Slower
%
Same
%
Faster

Net

Index
Dec 2005 12 79 9 +3 53.5
Nov 2005 19 74 7 +12 58.3
Oct 2005 26 70 4 +22 61.7
Sep 2005 21 75 4 +17 59.3

Inventories

Manufacturers' inventories declined in December for the ninth consecutive month as ISM's Inventories Index registered 47.2 percent, indicating a faster rate of liquidation when compared to November's reading of 49.3. December's index represents a 2.1 percentage point decrease from November's index. An Inventories Index greater than 42.3 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (in chained 2000 dollars). The three industries reporting higher inventories in December are: Food; Paper; and Electronic Components & Equipment.


Inventories
%
Higher
%
Same
%
Lower

Net

Index
Dec 2005 12 69 19 -7 47.2
Nov 2005 15 64 21 -6 49.3
Oct 2005 13 67 20 -7 48.1
Sep 2005 17 65 18 -1 49.6

Customers' Inventories**

The December Customers' Inventories Index is at 48 percent, 4.5 percentage points higher than the 43.5 percent reported in November. While the index indicates that respondents believe their customers do not have sufficient inventories on hand (inventories are too low) at this time, it is important to note that 70 percent indicate that inventories are "about right." This is the 55th consecutive month that the index has registered below 50 percent. Nine industries reported higher customers' inventories during December: Paper; Furniture; Textiles; Glass, Stone & Aggregate; Rubber & Plastic Products; Miscellaneous*; Transportation & Equipment; Chemicals; and Primary Metals.

Customers'
Inventories
%
Reporting
%Too
High
%About
Right
%Too
Low

Net

Index
Dec 2005 76 13 70 17 -4 48.0
Nov 2005 72 9 69 22 -13 43.5
Oct 2005 79 8 66 26 -18 41.0
Sep 2005 74 9 71 20 -11 44.5

Prices**

In December, the ISM Prices Index was 63 percent, indicating significant pricing activity. However, the index is down 11 percentage points from the 74 percent it registered in November. While 37 percent of supply executives reported paying higher prices and 11 percent reported paying lower prices, the majority of respondents (52 percent) reported that prices were unchanged from the preceding month.

A Prices Index above 47.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. In December, 14 industries reported paying higher prices: Petroleum; Rubber & Plastic Products; Furniture; Paper; Glass, Stone & Aggregate; Miscellaneous*; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Fabricated Metals; Textiles; Electronic Components & Equipment; Instruments & Photographic Equipment; Chemicals; and Food.


Prices
%
Higher
%
Same
%
Lower

Net

Index
Dec 2005 37 52 11 +26 63.0
Nov 2005 53 42 5 +48 74.0
Oct 2005 70 28 2 +68 84.0
Sep 2005 60 36 4 +56 78.0

Backlog of Orders**

ISM's Backlog of Orders Index registered 49.5 percent, indicating manufacturers' backlogs in December are contracting when compared to November. This 3.5 percentage point decrease from the 53 percent reported in November is a reversal from growth to contraction. Of the 86 percent of respondents who report their backlog of orders, 22 percent reported greater backlogs, 23 percent reported smaller backlogs, and 55 percent reported no change from November. The seven industries reporting an increase in order backlogs during the month are: Food; Textiles; Rubber & Plastic Products; Primary Metals; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; and Transportation & Equipment.

Backlog of
Orders
%
Reporting
%
Greater
%
Same
%
Less

Net

Index
Dec 2005 86 22 55 23 -1 49.5
Nov 2005 83 24 58 18 +6 53.0
Oct 2005 85 29 53 18 +11 55.5
Sep 2005 85 28 54 18 +10 55.0

New Export Orders

ISM's New Export Orders Index for December registered 54.3 percent, a decrease of 4.9 percentage points when compared to November's index of 59.2 percent. This is the 48th consecutive month of growth in export orders. The eight industries reporting growth in new export orders in December are: Food; Apparel; Instruments & Photographic Equipment; Furniture; Electronic Components & Equipment; Transportation & Equipment; Fabricated Metals; and Industrial & Commercial Equipment & Computers.

New Export
Orders
%
Reporting
%
Higher
%
Same
%
Lower

Net

Index
Dec 2005 76 12 83 5 +7 54.3
Nov 2005 74 19 78 3 +16 59.2
Oct 2005 76 15 77 8 +7 54.8
Sep 2005 74 17 78 5 +12 56.9

Imports

Imports of materials by manufacturers grew during December as the Imports Index registered 52.8 percent. The index decreased 1.3 percentage points when compared to November's index of 54.1 percent, indicating a slower rate of growth. The six industries reporting growth in import activity for December are: Miscellaneous*; Food; Instruments & Photographic Equipment; Furniture; Rubber & Plastic Products; and Industrial & Commercial Equipment & Computers.


Imports
%
Reporting
%
Higher
%
Same
%
Lower

Net

Index
Dec 2005 80 13 79 8 +5 52.8
Nov 2005 78 15 77 8 +7 54.1
Oct 2005 78 20 72 8 +12 58.2
Sep 2005 77 16 76 8 +8 53.4

*Miscellaneous is a preponderance of jewelry, toys, sporting goods and musical instruments.

**The Backlog of Orders, Prices and Customers' Inventories Indexes do not meet the accepted criteria for seasonal adjustments.

Buying Policy

Average commitment leadtime for Capital Expenditures increased 5 days to 113 days. Average leadtime for Production Materials increased 1 day to 51 days. Average leadtime for Maintenance, Repair and Operating (MRO) supplies increased 5 days to 27 days.

Percent Reporting

Capital
Expenditures
Hand-
to-
Mouth

30
Days

60
Days

90
Days

6
Months

1
Year+

Average
Days
Dec 2005 22 11 13 18 25 11 113
Nov 2005 24 9 16 17 24 10 108
Oct 2005 25 8 13 18 26 10 110
Sep 2005 25 9 14 18 25 9 106
 

Production
Materials
Hand-
to-
Mouth

30
Days

60
Days

90
Days

6
Months

1
Year+

Average
Days
Dec 2005 20 36 27 11 5 1 51
Nov 2005 16 41 27 11 4 1 50
Oct 2005 22 36 25 12 3 2 50
Sep 2005 23 38 26 9 2 2 47
 

MRO
Supplies
Hand-
to-
Mouth

30
Days

60
Days

90
Days

6
Months

1
Year+

Average
Days
Dec 2005 51 31 12 5 0 1 27
Nov 2005 55 30 12 3 0 0 22
Oct 2005 51 32 13 3 1 0 24
Sep 2005 53 33 11 3 0 0 22

About this Report

The data presented herein is obtained from a survey of manufacturing supply managers based on information they have collected within their respective organizations. ISM makes no representation, other than that stated within this release, regarding the individual company data collection procedures. Use of the data is in the public domain and should be compared to all other economic data sources when used in decision-making.

Data and Method of Presentation

The Manufacturing ISM Report On Business® is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. Membership of the Business Survey Committee is diversified by Standard Industrial Classification (SIC) category, based on each industry's contribution to gross domestic product (GDP). Twenty industries from various U.S. geographical areas are represented on the committee. The 20 manufacturing Standard Industry Classification codes are: Food; Tobacco; Textiles; Apparel; Wood & Wood Products; Furniture; Paper; Printing & Publishing; Chemicals; Petroleum; Rubber & Plastic Products; Leather; Glass, Stone & Aggregate; Primary Metals; Fabricated Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Instruments & Photographic Equipment; and Miscellaneous (a preponderance of jewelry, toys, sporting goods and musical instruments).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers' Inventories, Employment and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher, better and slower for Supplier Deliveries) and the negative economic direction (lower, worse and faster for Supplier Deliveries), and the diffusion index. Responses are raw data and are never changed. The diffusion index includes the percent of positive responses plus one-half of those responding the same (considered positive).

The resulting single index number is then seasonally adjusted to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-moveable holidays. All seasonal adjustment factors are supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them. The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with varying weights: New Orders – 30%; Production – 25%; Employment – 20%; Supplier Deliveries – 15%; and Inventories – 10%.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI in excess of 42.7 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.7 percent, it is generally declining. The distance from 50 percent or 42.7 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, ISM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

Responses to Buying Policy reflect the percent reporting the current month's leadtime, the approximate weighted number of days ahead for which commitments are made for Production Materials, Capital Expenditures, and Maintenance, Repair and Operating (MRO) Supplies, expressed as hand-to-mouth (five days), 30 days, 60 days, 90 days, six months (180 days), a year or more (360 days), and the weighted average number of days. These responses are raw data, never revised, and not seasonally adjusted since there is no significant seasonal pattern.

The Manufacturing ISM Report On Business® is published monthly by the Institute for Supply Management™. The Institute for Supply Management™, established in 1915, is the largest supply management organization in the world as well as one of the most respected. ISM's mission is to lead the supply management profession through its standards of excellence, research, promotional activities and education. This report has been issued by the association since 1931, except for a four-year interruption during World War II.

The full text version of the Manufacturing ISM Report On Business® is posted on ISM's Web site at www.ism.ws on the first business day of every month after 10:10 a.m. (ET).

The next Manufacturing ISM Report On Business® featuring the January 2006 data will be released at 10:00 a.m. (ET) on February 1, 2006.


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