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October 2005 Non-Manufacturing ISM Report On Business®

FOR RELEASE: November 3, 2005

Contact: Rose Marie Goupil
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
  E-mail: rgoupil@ism.ws
Business Activity at 60%

DO NOT CONFUSE THIS NATIONAL REPORT with the various 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 October 2005.


Backlog of Orders Index Up 3 Points to 55%; Supplier Deliveries Index Up 2.5 Points to 58.5%;
Inventory Sentiment Index Down 9 Points to 55%; Imports Index Down 5 Points to 53.5%;
Prices Index Down 3.4 Points to 78%

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in October 2005, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Ralph G. Kauffman, Ph.D., C.P.M., chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee and coordinator of the Supply Chain Management Program, University of Houston-Downtown. "Non-manufacturing business activity increased for the 31st consecutive month in October," Kauffman said. He added, "Business Activity increased at a faster rate in October than in September. Order Backlogs and New Orders also increased at faster rates, but Employment increased at a slower rate. Eleven of 17 non-manufacturing industry sectors report increased activity in October compared to eight that reported increased activity in September. Concern about the continued high level of energy prices and its impact on economic activity is again the number one topic on which survey respondents commented. Respondents also commented on Hurricanes Katrina and Rita and their impact on the energy supply and on the availability and cost of construction materials and truck transportation. The overall indication is continued economic growth in the non-manufacturing sector in October, but with a high level of concern about the impact of energy prices."

TOP PERFORMING INDUSTRIES

The 11 industries reporting growth in October — listed in order — are: Entertainment; Insurance; Communication; Health Services; Utilities; Other Services*; Construction; Retail Trade; Finance & Banking; Wholesale Trade; and Business Services. The three industries reporting activity the same as last month are: Mining; Real Estate; and Legal Services. The three industries reporting decreased activity from September to October are: Agriculture; Transportation; and Public Administration.

WHAT RESPONDENTS ARE SAYING …
  • "Petroleum-related cost increases are causing many customers to reduce their external spending to cover other internal expense increases. Some items are taking longer to get due to increased short-term demand." (Business Services)
  • "Hurricane Rita has drawn available products out of our market, causing higher costs and supply shortages." (Construction)
  • "Rising energy costs, as a result of the recent storms along the lower Gulf Coast, are having an impact on budgets and may delay planned capital spending unless supply and prices improve." (Other Services)
  • "Hurricanes have affected prices and delivery timetables." (Public Administration)
  • "Gas prices are definitely affecting retail sales." (Retail Trade)
  • "Overall business remains robust. There is a year-end push for delivery prior to year end, due to capital budgets. Due to [Hurricane] Katrina, all foams for upholstery and mattresses experiencing short supply and big price increases — up to 28 percent." (Wholesale Trade)
ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
OCTOBER 2005
  Non-Manufacturing Manufacturing
Index Series
Index
Oct.
Series
Index
Sept.
Percent
Point
Change
Direction Rate
of
Change
Trend**
(Months)
Series
Index
Oct.
Series
Index
Sept.
Percent
Point
Change
Business Activity / Production 60.0 53.3 +6.7 Increasing Faster 31 62.0 63.1 -1.1
New Orders 58.2 56.6 +1.6 Increasing Faster 31 61.7 63.8 -2.1
Employment 52.9 54.9 -2.0 Increasing Slower 25 55.0 53.1 +1.9
Supplier Deliveries 58.5 56.0 +2.5 Slowing Faster 50 61.7 59.3 +2.4
Inventories 50.0 50.0 0.0 Unchanged N/A 2 48.1 49.6 -1.5
Prices 78.0 81.4 -3.4 Increasing Slower 29 84.0 78.0 +6.0
Backlog of Orders 55.0 52.0 +3.0 Increasing Faster 9 55.5 55.0 +0.5
New Export Orders 54.5 55.0 -0.5 Increasing Slower 4 54.8 56.9 -2.1
Imports 53.5 58.5 -5.0 Increasing Slower 30 58.2 53.4 +4.8
Inventory Sentiment 55.0 64.0 -9.0 "Too High" Lesser 101 N/A N/A  
Customers' Inventories N/A N/A         41.0 44.5 -3.5

* Non-Manufacturing ISM Reports On Business® data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. Manufacturing ISM Reports On Business® data is seasonally adjusted except for Backlog of Orders, Prices and Customers' Inventories.
** Number of months moving in current direction

COMMODITIES REPORTED UP / DOWN IN PRICE, and IN SHORT SUPPLY

Commodities Up in Price

Airfares (7); Building Materials (2); Carpet; Cement (2); Cheese; Chemicals; Concrete; Construction/Construction Services (6); Construction Labor; Construction Materials; Copper (26); Dairy Products; #1 Diesel Fuel (8); #2 Diesel Fuel (10); Electricity; Energy (4); Energy-Related; Food/Food & Beverage; Freight Charges/Shipping Costs (4); Fuel (23); Fuel-Related Surcharges (4); Gasoline* (23); #2 Heating Oil (2); Hotel Rates/Costs (11); Janitorial Supplies; Lumber (2); Lumber Products; Natural Gas (5); Oil; Oil-Based Products (3); Packaging Supplies/Products (2); Paper/Paper Products (21); Petroleum/Petroleum-Based Products (4); Plastic Bags (2); Plastics/Plastic Products (4); Plywood; Poly Bags; Poly Products (various); Polyethylene Films (2); Printing/Printed Materials; PVC (2); Resin-Based (or related) Products; Roofing Materials (2); Steel (2); Steel Pipe; Stretch Film/Wrap (2); Transportation (3); Travel Costs; Tube Fittings/Tubing; and Vinyl.

Commodities Down in Price

Beef/Steaks/Frozen Beef; Corn; Corrugated (3); Gasoline*; Office Products/Supplies; Soybean Material/Meal; and Unleaded Gasoline.

Commodities in Short Supply

Construction Materials; Fuel; Petrochemicals; Plastic Products; Polyethylene; PVC (2); PVC Products; Resin-Based Products; Roofing Materials; Stretch Film/Wrap (2); and Tires.

*Reported as both up and down in price.

Note: The number of consecutive months the commodity is listed is indicated after each item.


OCTOBER 2005 NON-MANUFACTURING INDEX SUMMARIES


Business Activity

ISM's Non-Manufacturing Business Activity Index in October rebounded somewhat to 60 percent from September's drop to 53.3 percent, indicating a faster rate of growth of activity in October. This month, 11 sectors report increased business activity, three are reporting decreased activity, and three indicate unchanged activity compared to September.

The industries reporting the highest rates of growth of business activity in October are: Entertainment; Insurance; Communication; Health Services; and Utilities. The industries reporting contraction of business activity in October are: Agriculture; Transportation; and Public Administration.

Business
Activity
%Higher %Same %Lower Index
October 2005 31 54 15 60.0
September 2005 27 54 19 53.3
August 2005 37 51 12 65.0
July 2005 35 53 12 60.5


THE LAST 12 MONTHS
Month Business
Activity Index
  Month Business
Activity Index
Oct '05 60.0   Apr '05 61.7
Sep '05 53.3   Mar '05 63.1
Aug '05 65.0   Feb '05 59.8
July '05 60.5   Jan '05 59.2
June '05 62.2   Dec '04 63.9
May '05 58.5   Nov '04 61.9
Average for 12 months – 60.8
High – 65.0
Low – 53.3

New Orders

ISM's Non-Manufacturing New Orders Index increased to 58.2 percent in October from 56.6 percent in September. This indicates continued expansion of new orders at a faster rate of growth than in September. Comments from members include: "Our order position for November and December has improved significantly"; "New Orleans system rebuild"; "Business turnaround"; and "Growth and expansion."

Industries reporting the highest rates of growth of new orders in October are: Insurance; Communication; Health Services; Entertainment; and Utilities. Industries reporting contraction of new orders in October are: Agriculture; Transportation; Public Administration; Finance & Banking; and Business Services.

New Orders %Higher %Same %Lower Index
October 2005 27 58 15 58.2
September 2005 26 59 15 56.6
August 2005 37 54 9 65.8
July 2005 34 58 8 61.9

Employment

Employment activity in the non-manufacturing sector increased, but at a slower rate in October compared to September. This was the 25th consecutive monthly increase in non-manufacturing employment. ISM's Non-Manufacturing Employment Index for October is 52.9 percent, a drop of 2 percentage points from September's 54.9 percent. Nine industries are reporting increased employment, four report decreases, and four indicate employment is unchanged from September. Comments from respondents include: "Filling of many empty positions"; "More IT employees hired for special projects"; "New positions added"; and "Will be hiring to support higher levels."

The industries reporting the highest rates of growth in employment in October are: Mining; Health Services; Entertainment; Utilities; and Insurance. Industries reporting a reduction in employment in October are: Legal Services; Transportation; Wholesale Trade; and Other Services*.

Employment %Higher %Same %Lower Index
October 2005 16 72 12 52.9
September 2005 20 68 12 54.9
August 2005 26 66 8 59.6
July 2005 26 64 10 56.2

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 50th consecutive month in October. The index registered 58.5 percent, 2.5 percentage points higher than in September. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in October include: "Slower rail delivery"; "Problems of availability of castings for valve bodies, more demand for products needed to build energy transportation facilities"; "FEMA has tied up lots of trucks"; "Transportation and void in raw material manufacturing due to Gulf [Coast] disaster"; and "Supplier order backlog."

The industries reporting the highest rates of slowing in supplier deliveries in October are: Wholesale Trade; Construction; Utilities; Entertainment; and Agriculture. Industries reporting faster supplier deliveries in October are: Mining; Transportation; and Insurance.

Supplier
Deliveries
%Slower %Same %Faster Index
October 2005 21 75 4 58.5
September 2005 17 78 5 56.0
August 2005 12 86 2 55.0
July 2005 17 80 3 57.0

Inventories

ISM's Non-Manufacturing Inventories Index registered 50 percent in October, the same as in September. This month's and last month's reports indicate that inventories did not change from August, which ended seven consecutive months of higher inventories. Of the total respondents in October, 30 percent indicate they do not have inventories or do not measure them. Comments from members include: "Problems managing reverse logistics"; "Added new products to inventory system"; "Boosted inventories during storm recovery operations"; and "Trying to reduce our inventory."

The industries reporting inventory increases in October are: Construction; Communication; Real Estate; Health Services; Business Services; and Retail Trade. The industries reporting the highest rates of inventory decrease in October are: Legal Services; Insurance; Finance & Banking; Agriculture; and Other Services*.

Inventories %Higher %Same %Lower Index
October 2005 26 48 26 50.0
September 2005 22 56 22 50.0
August 2005 22 63 15 53.5
July 2005 24 57 19 52.5

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased in October for the 29th consecutive month, but at a slower rate of increase than in September. ISM's Non-Manufacturing Prices Index for October is 78 percent, 3.4 percentage points below the record 81.4 percent registered for September. In October, the percentage of respondents reporting higher prices declined from 58 percent to 54 percent, the proportion indicating no change rose from 40 percent to 41 percent, and the number of respondents noting lower prices increased from 2 percent to 5 percent.

The industries reporting the highest rates of increase in prices paid in October are: Mining; Utilities; Wholesale Trade; Agriculture; Construction; and Entertainment. No industry is reporting price decreases in October.

Prices %Higher %Same %Lower Index
October 2005 54 41 5 78.0
September 2005 58 40 2 81.4
August 2005 36 58 6 67.1
July 2005 39 58 3 70.3

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 55 percent in October, 3 percentage points higher than the 52 percent reported in September. October's report of increasing order backlogs marks 29 out of the last 30 months that an increase has been reported in order backlogs. Of the total respondents in October, 44 percent indicated they do not measure backlog of orders. Purchasing and supply executives' comments on backlogs of orders include: "High demand not matching supply"; "Impact of hurricanes on deliveries and some supply items"; and "Push out on delivery dates by suppliers."

The industries reporting increases in order backlogs in October are: Insurance; Communication; Utilities; Construction; Retail Trade; Wholesale Trade; and Other Services*. Industries reporting the highest rates of decrease in backlog of orders in October are: Agriculture; Finance & Banking; Business Services; Health Services; and Public Administration.

Backlog
of Orders
%Higher %Same %Lower Index
October 2005 23 64 13 55.0
September 2005 19 66 15 52.0
August 2005 12 80 8 52.0
July 2005 19 69 12 53.5

New Export Orders

Orders and requests for services and other non-manufacturing activities to be provided outside of the United States by domestically based personnel increased for the fourth consecutive month in October. The October index marks 26 out of the past 27 months that the index has exhibited growth. The New Export Orders Index for October is 54.5 percent, compared to September's 55 percent. Of the total respondents in October, 80 percent indicated they either do not perform, or do not separately measure, orders for work outside of the United States.

The industries reporting the highest rates of increase in new export orders in October are: Construction; Finance & Banking; Insurance; Entertainment; and Wholesale Trade. Industries reporting decreases in new export orders in October are: Business Services; Communication; and Public Administration.

New Export
Orders
%Higher %Same %Lower Index
October 2005 23 63 14 54.5
September 2005 27 56 17 55.0
August 2005 32 63 5 63.5
July 2005 18 71 11 53.5

Imports

In October, the ISM Imports Index registered 53.5 percent, 5 percentage points lower than the 58.5 percent reported in September. This indicates that use of imported materials by non-manufacturing industries increased at a slower rate in October than in September. October's index marks the 30th consecutive month of import growth. In October, 67 percent of respondents reported that they do not use or do not track the use of imported materials.

The industries reporting increases in the use of imports in October are: Utilities; Business Services; Wholesale Trade; and Retail Trade. Industries reporting decreases in the use of imports in October are: Public Administration and Health Services.

Imports %Higher %Same %Lower Index
October 2005 19 69 12 53.5
September 2005 24 69 7 58.5
August 2005 25 73 2 61.5
July 2005 26 72 2 62.0

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in October registered 55 percent, 9 percentage points lower than the 64 percent reported in September. This indicates that non-manufacturing purchasing and supply executives feel a much lesser degree of discomfort with current levels of inventory in October than they did during September. In fact, this is the least degree of discomfort with high inventory levels that respondents have reported since inception of ISM's non-manufacturing business survey in 1997. In October, 22 percent of respondents felt their inventories were too high,12 percent indicated their inventories were too low, and 66 percent said that their inventories were about right.

The industries reporting the highest rates of feeling that their inventories are too high in October are: Construction; Communication; Other Services*; Public Administration; and Business Services. Industries reporting that their inventories are too low in October are: Finance & Banking; Entertainment; and Utilities.

Inventory
Sentiment
%Too High %About Right %Too Low Index
October 2005 22 66 12 55.0
September 2005 33 62 5 64.0
August 2005 37 60 3 67.0
July 2005 35 58 7 64.0

*Other Services include:
Hotels, Rooming Houses, Camps, and Other Lodging Places; Personal Services; Automotive Repair, Services, and Parking; Miscellaneous Repair Services; Educational Services; Social Services; Museums, Art Galleries, and Botanical and Zoological Gardens; Membership Organizations; Engineering, Accounting, Research, Management and Related Services; and Miscellaneous Services.

About this Report

The data presented herein is obtained from a survey of non-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 Non-Manufacturing ISM Reports On Business® is based on data compiled from monthly replies to questions asked of more than 370 purchasing and supply executives in over 62 different industries representing nine divisions from the Standard Industrial Classification (SIC) categories. Membership of the Business Survey Committee is diversified by SIC category and is based on each industry's contribution to gross domestic product (GDP).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment and Supplier Deliveries), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher and slower for Supplier Deliveries) and the negative economic direction (lower and faster for Supplier Deliveries). Responses represent raw data and are never changed. Data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. The remaining indexes have not indicated significant seasonality.

A weighted composite index similar to the PMI that is so popular in the Manufacturing ISM Reports On Business® is not available. Several years of data will need to be developed before that type of non-manufacturing indicator can be developed. Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index reading above 50 percent indicates that the non-manufacturing economy in that index is generally expanding; below 50 percent indicates that it is generally declining. Supplier Deliveries is an exception. A Supplier Deliveries Index above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

The Non-Manufacturing ISM Reports On Business® is published monthly by the Institute for Supply Management™, the largest supply management research and education organization in the United States. 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.

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

The next Non-Manufacturing ISM Reports On Business® featuring the November 2005 data will be released at 10:00 a.m. (ET) on December 5, 2005.



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