Spring 2006 Semiannual Economic Forecast

FOR RELEASE: May 9, 2006

Contact: Rose Marie Goupil
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, ext. 3015
  E-mail: rgoupil@ism.ws

Supply Managers Expect Economy to Maintain Growth in Second Half of 2006
Manufacturing Expansion Continues in 2006
Revenue to Grow by 6.6%
Capital Investment up 6.1%
Capacity Utilization at 85.6%
Non-Manufacturing Expansion Also Continues in 2006
Revenue to Grow by 6.0%
Capital Investment up 7.8%
Capacity Utilization at 88.4%

(Tempe, Arizona) — Economic growth in the United States will continue in the second half of 2006, say the nation's purchasing and supply management executives in their spring 2006 Semiannual Economic Forecast.

These projections are part of the forecast issued by the Business Survey Committee of the Institute for Supply Management™ (ISM). The forecast was released today by Norbert J. Ore, C.P.M., chair of the ISM Manufacturing Business Survey Committee, and group director, strategic sourcing and procurement, Georgia-Pacific Corporation; and by Ralph G. Kauffman, Ph.D., C.P.M., chair of the ISM Non-Manufacturing Business Survey Committee and coordinator of the supply chain management program at the University of Houston-Downtown.

Manufacturing Summary

Expectations for 2006 remain high as 72 percent of survey respondents forecast revenues to be greater in 2006 than in 2005. Expectations are higher overall as the panel of purchasing and supply executives now expects a 6.6 percent net increase in overall revenues for 2006 compared to their December 2005 forecast of 5.4 percent. Industries expecting above average improvement in 2006 are: Apparel; Electronic Components & Equipment; Glass, Stone & Aggregate; Food; Primary Metals; Instruments & Photographic Equipment; and Industrial & Commercial Equipment & Computers.

Non-Manufacturing Summary

Sixty-eight percent of non-manufacturing purchasing and supply executives expect their 2006 revenues to be greater than in 2005. They currently expect a 6 percent net increase in overall revenues compared to a 5.8 percent increase reported for 2005. Non-manufacturing industries expecting average or greater improvement in 2006 are — listed in order — Real Estate; Mining; Business Services; Entertainment; Construction; Transportation; Utilities; Wholesale Trade; Finance & Banking; and Retail Trade.


OPERATING RATE

Manufacturing

Manufacturing purchasing and supply executives report that their companies are currently operating at 85.6 percent of normal capacity. This is an increase from December 2005 (85.3 percent) and less than the rate reported in April 2005 (86.8 percent). Although the current rate is slightly less than the 10-year high reported in April 2000 (87.4 percent), it is two percentage points higher than the 10-year average of 83.6 percent. Recent monthly data from the Manufacturing ISM Report On Business® indicates the manufacturing sector has grown for 35 consecutive months. The following nine industries are operating at or above the average capacity of 85.6 percent: Apparel; Electronic Components & Equipment; Primary Metals; Glass, Stone & Aggregate; Paper; Miscellaneous*; Rubber & Plastic Products; Food; and Wood & Wood Products.

Non-Manufacturing

Non-manufacturing purchasing and supply executives report that their organizations are currently operating at 88.4 percent of normal capacity. This is slightly higher than the 87 percent reported in December 2005, and higher than the 86.9 percent reported in April 2005. Considering production capacity increases reported in the following section of this forecast, this indicates that non-manufacturing industries are continuing to add capacity in 2006 and are employing it at a slightly higher rate. The following industries are operating at capacity levels at or above the average rate (88.4 percent): Real Estate; Mining; Finance & Banking; Utilities; Transportation; Public Administration; Legal Services; Other Services*; and Insurance.

Operating Rate
  Manufacturing Non-Manufacturing
  April
2005
Dec
2005
April
2006
April
2005
Dec
2005
April
2006
90%+ 43% 47% 49% 56% 53% 53%
50%-89% 56% 51% 49% 43% 46% 47%
Below 50% 1% 2% 2% 1% 1% 0%
Est. Overall Average 86.8% 85.3% 85.6% 86.9% 87.0% 88.4%


PRODUCTION CAPACITY — April 2006

Manufacturing

Production capacity is now expected to increase 5.6 percent in 2006. This is slightly higher than the expected increase of 5.3 percent predicted in the December 2005 forecast for 2006. Presently, 46 percent of supply executives expect an average increase of 14.2 percent, 5 percent expect decreases averaging 19.4 percent, and 49 percent expect no change. The following seven industries expect to expand at or above 5 percent: Apparel; Miscellaneous*; Transportation & Equipment; Electronic Components & Equipment; Food; Furniture; and Primary Metals.

Manufacturing Production Capacity
  For 2005 For 2006 For 2006
  Reported
Dec 2005
Magnitude
of Change
Predicted
Dec 2005
Magnitude
of Change
Predicted
April 2006
Magnitude
of Change
Higher 51% + 14.5% 51% + 10.7% 46% + 14.2%
Same 42% NA 47% NA 49% NA
Lower 7% - 30.2% 2% - 8.3% 5% - 19.4%
Net Average   + 5.3%   + 5.3%   + 5.6%

Non-Manufacturing

The capacity to produce products or provide services in the non-manufacturing sector is expected to increase 5.5 percent during 2006. This compares to an increase of 2.9 percent reported for 2005 and a prediction in December 2005 of a 3.7 percent increase in 2006. For 2006, 48 percent of non-manufacturing purchasers expect their capacity to increase by an average of 12 percent, and 3 percent of respondents foresee their capacity decreasing by an average of 9.8 percent. Forty-nine percent expect no change in their capacity. The industries expecting to add more than the average 5.5 percent to their production capacity are: Insurance; Entertainment; Transportation; Mining; Public Administration; Wholesale Trade; Business Services; and Construction.

Non-Manufacturing Production or Provision Capacity
  For 2005 For 2006 For 2006
  Reported
Dec 2005
Magnitude
of Change
Predicted
Dec 2005
Magnitude
of Change
Predicted
April 2006
Magnitude
of Change
Higher 40% + 8.0% 50% + 7.4% 48% +12.0%
Same 57% NA 50% NA 49% NA
Lower 3% - 10% 0% 0% 3% - 9.8%
Net Average   + 2.9%   + 3.7%   + 5.5%


PREDICTED CAPITAL EXPENDITURES — 2006 vs. 2005

Manufacturing

Supply executives expect capital expenditures to rise 6.1 percent in 2006. This is a significant revision in expectations when compared to the prediction of 9 percent in the December 2005 forecast for 2006. The 38 percent of respondents who predict increased capital expenditures in 2006 indicate an average increase of 28.9 percent, while the 16 percent who said their capital spending would be reduced predict an average decrease of 29.6 percent; 46 percent said they expect to spend the same in 2006 as in 2005. Industries showing the largest increases (5% or more) in capital expenditures for 2006 — in order of percentage increase — are: Industrial & Commercial Equipment & Computers; Glass, Stone & Aggregate; Transportation & Equipment; Primary Metals; Fabricated Metals; Apparel; and Instruments & Photographic Equipment.

Non-Manufacturing

Non-manufacturing purchasing and supply executives are expecting to increase their level of capital expenditures 7.8 percent in 2006 compared to 2005. The 42 percent of members expecting to spend more predict an average increase of 25.9 percent. An additional 14 percent anticipate a decrease averaging 21.3 percent. However, 44 percent expect to spend the same on capital expenditures in 2006 as in 2005. Industries expecting greater than the average 7.8% increase in capital expenditures in 2006 are: Retail Trade; Utilities; Mining; and Insurance.

Predicted Capital Expenditures 2006 vs. 2005
  Manufacturing Non-Manufacturing
  Predicted
Dec 2005
Predicted
April 2006
Magnitude
of Change
Predicted
Dec 2005
Predicted
April 2006
Magnitude
of Change
Higher 43% 38% + 28.9% 56% 42% + 25.9%
Same 38% 46% NA 32% 44% NA
Lower 19% 16% - 29.6% 12% 14% - 21.3%
Net Average + 9%   + 6.1% + 11.1%   + 7.8%


PRICES — Changes Between End of 2005 and April 2006

Manufacturing

After an initial forecast in December 2005 of a 3.5 percent increase in prices paid during the first four months of 2006, survey respondents report that prices are slightly above expectations. They now report an increase of 4 percent for the period, as the 75 percent who say their prices are higher now than at the end of 2005 report an average increase of 5.9 percent, while the 9 percent who report lower prices averaged a 5.2 percent decrease. The remaining 16 percent indicate no change between the end of 2005 and April 2006. Industries experiencing higher-than-average price increases are: Primary Metals; Miscellaneous*; Glass, Stone & Aggregate; Furniture; Food; and Rubber & Plastic Products.

Non-Manufacturing

Non-manufacturing members report that their purchases in the first four months of this year cost an average of 4.6 percent more than they would have at the end of 2005. This is 1.2 percent above the 3.4 percent predicted for this period in December 2005. Seventy-three percent of non-manufacturing purchasers report the prices they paid increased an average of 6.8 percent in the first part of 2006. Also, 9 percent report price decreases averaging 5.1 percent. The remaining 18 percent indicate no change in prices in the first four months of 2005. Industries reporting a greater-than-average increase in prices they pay in the first part of 2006 are: Transportation; Agriculture; Construction; Utilities; Real Estate; Entertainment; Other Services*; and Public Administration.

Prices — Changes Between End of 2005 and April 2006
  Manufacturing Non-Manufacturing
  Predicted
Dec 2005
Reported
April 2006
Magnitude
of Change
Predicted
Dec 2005
Reported
April 2006
Magnitude
of Change
Higher 69% 75% + 5.9% 70% 73% + 6.8%
Same 17% 16% NA 22% 18% NA
Lower 14% 9% - 5.2% 8% 9% - 5.1%
Net Average + 3.5%   + 4.0% + 3.4%   + 4.6%


PRICES — Predicted Changes Between End of 2005 and End of 2006

Manufacturing

The forecast indicates respondents predict a net average increase of 4.2 percent between December 2005 and December 2006, indicating they expect price increases to moderate during the period of May 2006 through December 2006 at a rate of 0.2 percent. Seventy-four percent expect an average price increase of 6.7 percent, while 12 percent expect an average decline of 5.6 percent. The remaining 14 percent expect no change in their average prices paid for the year. Industries expecting to pay above average prices by the end of 2006 are: Primary Metals; Furniture; Glass, Stone & Aggregate; Fabricated Metals; Rubber & Plastic Products; Paper; and Food.

Non-Manufacturing

Looking out to the end of 2006, non-manufacturing purchasers expect prices they pay to increase by 5.3 percent over the entire year. Seventy-six percent of purchasers anticipate price increases averaging 7.8 percent. Eight percent of purchasers expect decreased prices with an average reduction of 8 percent, and 16 percent of members do not expect prices to change. Industries expecting higher-than-average rates of price increases in 2006 are: Construction; Utilities; Mining; Public Administration; and Other Services*.

Prices — Predicted Changes Between End of 2005 and End of 2006
  Manufacturing Non-Manufacturing
  Predicted
Dec 2005
Predicted
April 2006
Magnitude
of Change
Predicted
Dec 2005
Predicted
April 2006
Magnitude
of Change
Higher 71% 74% + 6.7% 73% 76% + 7.8%
Same 11% 14% NA 18% 16% NA
Lower 18% 12% - 5.6% 9% 8% - 8.0%
Net Average + 3.8%   + 4.2% + 4.0%   + 5.3%


EMPLOYMENT

Change in Overall Employment — Balance 2006

Manufacturing

ISM's Manufacturing Business Survey Committee members report employment growth for the balance of 2006, as members now forecast that manufacturing employment will increase 0.9 percent during the balance of 2006, with 37 percent expecting employment to be an average of 6.5 percent higher. This is compared to the 14 percent who predict employment to be lower by an average of 10.9 percent. The remaining 49 percent of members expect their employment levels to be unchanged in 2006. Industries expecting the highest increases in employment through the remainder of 2006 are: Primary Metals; Electronic Components & Equipment; Transportation & Equipment; Apparel; Textiles; Glass, Stone & Aggregate; Food; and Furniture.

Non-Manufacturing

ISM's Non-Manufacturing Business Survey Committee members forecast that employment will increase 2.1 percent during the balance of 2006. For the remaining months of 2006, 38 percent expect higher levels of employment, 9 percent of members anticipate lower levels, and 53 percent expect their employment levels to be unchanged. Industries anticipating above average increases in their employment in the coming months of 2006 are: Entertainment; Business Services; Health Services; Construction; Other Services*; and Communication.

Predicted Change in Overall Employment
  Manufacturing Non-Manufacturing
  Predicted
for 2006
Dec 2005
Balance
of 2006
April 2006
Nominal
Change
Predicted
for 2006
Dec 2005
Balance
of 2006
April 2006
Nominal
Change
Higher 31% 37% + 6.5% 41% 38% + 7.2%
Same 54% 49% NA 50% 53% NA
Lower 15% 14% - 10.9% 9% 9% - 7.5%
Net Average + 1.3%   + 0.9% + 2.3%   + 2.1%
Diffusion Index 58% 61.5%   66% 64.5%  


BUSINESS REVENUES

Business Revenues Comparison — 2006 vs. 2005

Manufacturing

Summarizing revenues for 2006, 72 percent of survey respondents say revenues will be better than 2005, and their nominal (before adjusting for inflation) revenues will increase an average of 10.2 percent over 2005. Conversely, 9 percent say their nominal revenues will decrease in 2006 by an average of 9.5 percent, and the remaining 19 percent indicate no change. Respondents indicate an overall net nominal increase of 6.6 percent in business revenues for 2006 over 2005. This represents a significant increase when compared to the December 2005 forecast of 5.4 percent increase for 2006 over 2005, and less than the 7.3 percent increase reported in December 2005 for 2005 revenues over 2004 revenues. Industries expecting a 5 percent or greater increase in revenues in 2006 are: Apparel; Electronic Components & Equipment; Glass, Stone & Aggregate; Food; Primary Metals; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Chemicals; Transportation & Equipment; and Wood & Wood Products.

Manufacturing Business Revenues
  2005 vs 2004 2006 vs 2005
  Reported
Dec 2005
Nominal
% Change
Predicted
Dec 2005
Nominal
% Change
Predicted
April 2006
Nominal
% Change
Higher 71% + 13.8% 75% + 9.4% 72% + 10.2%
Same 14% NA 17% NA 19% NA
Lower 15% - 17.6% 8% - 19.8% 9% - 9.5%
Net Average   + 7.3%   + 5.4%   + 6.6%

Non-Manufacturing

Non-manufacturing purchasers forecast that business revenues for 2006 will be improved over 2005 by 6 percent. This is lower than the 6.6 percent increase predicted in December 2005 for 2006 but higher than the 5.8 percent increase reported at that time for 2005 revenues over 2004 revenues. The 68 percent of members forecasting better business in 2006 than in 2005 estimate an average nominal (before adjusting for inflation) revenue increase of 10.7 percent. This compares to an average nominal decrease of 17.1 percent forecast by the 7 percent who predict worse business in 2006. The remaining 25 percent see no change in 2006. Industries expecting a 5 percent or greater increase in revenues in 2006 are: Real Estate; Mining; Business Services; Entertainment; Construction; Transportation; Utilities; Wholesale Trade; Finance & Banking; Retail Trade; and Health Services.

Non-Manufacturing Business Revenues
  2005 vs 2004 2006 vs 2005
  Reported
Dec 2005
Nominal
% Change
Predicted
Dec 2005
Nominal
% Change
Predicted
April 2006
Nominal
% Change
Higher 69% + 9.9% 74% + 9.4% 68% + 10.7%
Same 20% NA 22% NA 25% NA
Lower 11% - 9.4% 4% - 6.6% 7% - 17.1%
Net Average   + 5.8%   + 6.6%   + 6.0%


SUMMARY

Manufacturing
  • Operating rate is currently 85.6 percent of normal capacity.
  • Production capacity will increase 5.6 percent in 2006.
  • Capital expenditures will increase 6.1 percent in 2006.
  • Prices paid increased 4 percent through the end of April.
  • Expect an additional 0.2 percent increase in prices by the end of 2006.
  • Manufacturing employment will increase 0.9 percent during the balance of 2006.
  • Manufacturing revenues will increase 6.6 percent in 2006.
  • Overall, manufacturing is benefiting from revenue growth and a high utilization rate, and is willing to invest through capital expansion.
Non-Manufacturing
  • Operating rate is currently 88.4 percent of normal capacity.
  • Production capacity will increase 5.5 percent in 2006.
  • Capital expenditures will increase 7.8 percent in 2006.
  • Prices paid increased 4.6 percent through the end of April.
  • Expect an additional 0.7 percent increase in prices by the end of 2006.
  • Non-manufacturing employment will increase 2.1 percent during the remainder of 2006.
  • Non-manufacturing revenues will increase 6 percent in 2006.
  • Overall, non-manufacturing is experiencing good revenue growth and a high utilization rate. Significant capital investment and capacity expansion plans indicate confidence in the economy going forward.

*Miscellaneous items include: a preponderance of jewelry, toys, sporting goods and musical instruments.

**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.

In addition to the forecast, the Manufacturing ISM Report On Business® is issued monthly on the first business day of each month and is considered by many economists to be the most reliable near-term economic barometer available. It is reviewed regularly by top government agencies and economic business leaders. The report, compiled from responses to questions asked of approximately 400 purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies and prices. The report has been issued by the association since 1931, except during World War II.

Covering the non-manufacturing sector, ISM debuted the Non-Manufacturing ISM Report On Business® in June 1998. The Non-Manufacturing ISM Report On Business® is released on the third business day of each month, and is based on data received from purchasing and supply executives from 17 different non-manufacturing industries across the country. The report covers business activity, new orders, backlog of orders, new export orders, inventory change, inventory sentiment, imports, prices, employment and supplier deliveries. A weighted composite index similar to the PMI is not available at this time for this report.

The Manufacturing and Non-Manufacturing ISM Reports On Business® are published monthly by the Institute for Supply Management™. As the oldest and largest supply management institute in the world, the mission of the Institute for Supply Management™ (ISM) is to lead supply management. By executing and extending its mission through education, research, standards of excellence, influence building and information dissemination — including the renowned monthly ISM Report On Business® report — ISM continues to extend the global impact of supply management. ISM's membership base includes approximately 40,000 supply management professionals in 75 countries. Supply management professionals are responsible for trillions of dollars in the purchases of products and services annually. ISM is a member of the International Federation of Purchasing and Supply Management (IFPSM).

The full text version of the reports is posted on ISM's Home Page at www.ism.ws on the first and third business day of every month after 10:10 a.m. (ET).

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

The next Non-Manufacturing ISM Report On Business® featuring the May 2006 data will be released at 10:00 a.m. (ET) on Monday, June 5, 2006.