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72nd Semiannual Economic Forecast

FOR RELEASE: December 12, 2006

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

ECONOMIC GROWTH TO CONTINUE IN 2007
Manufacturing Growth Expected in 2007
Revenue to Increase 6.4%
Capital Expenditures to Increase 8.5%
Capacity Utilization Currently at 84.5%
Non-Manufacturing to Maintain Strength
Revenue to Increase 6.4%
Capital Spending to Increase 8.2%
Capacity Utilization Currently at 86.3%

(New York, NY) — Economic growth in the United States will continue in 2007, say the nation's purchasing and supply management executives in their 72nd Semiannual Economic Forecast.

Expectations for 2007 are at relatively high levels for both manufacturing and non-manufacturing sectors. Both sectors are optimistic about 2007, with revenues expected to grow equally in both sectors.

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 Anthony S. Nieves, C.P.M., CFPM, chair of the ISM Non-Manufacturing Business Survey Committee and senior vice president – supply management, Hilton Hotels Corporation.

Manufacturing Summary

Expectations for 2007 are high as 72 percent of survey respondents expect revenues to be greater in 2007 than in 2006. The panel of purchasing and supply executives expects a 6.4 percent net increase in overall revenues for 2007, compared to an increase of 6.2 percent increase reported for 2006. Manufacturing industries expecting the greatest improvement over 2006 — listed in order — are: Chemical Products; Transportation Equipment; Primary Metals; Food, Beverage & Tobacco Products; Computer & Electronic Products; Miscellaneous Manufacturing*; and Electrical Equipment, Appliances & Components.

"Manufacturing purchasing and supply executives are optimistic about their organizations' prospects for the first half of 2007, and predict additional growth during the second half," said Ore. "While 2006 has been a good year overall, it has presented challenges with regard to energy costs and overall inflation in manufacturing costs. Respondents now expect those pressures to subside in 2007 based on their overall price forecast. Manufacturing has lost momentum in the past several months, with a decline in new orders and production, ending 41 consecutive months of growth in November 2006 as measured by and reported in the monthly Manufacturing ISM Report On Business®."

In the manufacturing sector, respondents report operating at 84.5 percent of their normal capacity, down from 85.6 percent reported in April 2006. Purchasing and supply executives predict that capital expenditures will increase by 8.5 percent in 2007, compared to a 7.3 percent increase reported for 2006. Survey respondents also forecast that they will reduce inventories in an effort to decrease their purchased inventory-to-sales ratio in 2007. Manufacturers have an expectation that employment in the sector will grow by a meager 0.1 percent, while labor and benefits costs are expected to increase an average of 2.5 percent. Manufacturing purchasers are predicting growth in exports and imports. They also expect the U.S. dollar to strengthen against the currencies of major trading partners.

The panel also predicts the prices they pay will increase 1.4 percent during the first four months of 2007, and will decrease 0.3 percent for the balance of 2007, with an overall increase of 1.1 percent for 2007. Respondents' major concerns are: inflation; energy cost and supply; healthcare costs; China — currency and imports; and labor and benefits costs.

A special question was asked to determine the progress of organizations in achieving efficiencies from the application of technology to supply management. Respondents believe they are only 50 percent complete on average in achieving benefits from technology in their supply chain, indicating there is still significant improvement to be gained from the application of technology in manufacturing.

Survey respondents expect to realize supply chain improvements through new or improved enterprise technology; improved supplier management practices; improved inventory management; increased low cost country sourcing; and application of lean manufacturing concepts to supply chain.

Non-Manufacturing Summary

Seventy-two percent of non-manufacturing supply management executives expect their 2007 revenues to be greater than in 2006. They currently expect a 6.4 percent net increase in overall revenues for 2007 compared to a 7.7 percent increase reported for 2006. Non-manufacturing industries expecting the greatest improvement over 2006 — listed in order — are: Mining; Professional, Scientific & Technical Services; Wholesale Trade; Transportation & Warehousing; Educational Services; and Information.

"Non-manufacturing supply managers report operating at 86.3 percent of their normal capacity, slightly below the 88.4 percent reported in April 2006. They are optimistic about continued growth in the first half of 2007 compared to the second half of 2006, and they have a higher level of overall optimism about the next 12 months than they had last December for 2006," said Nieves. "They forecast that their capacity to produce products and provide services will rise by 6.2 percent during 2007, and capital expenditures will increase by 8.2 percent above the 2006 level. Non-manufacturers also predict that their employment will grow by 1.6 percent during 2007. Their major economic concerns are: energy, fuel and transportation costs; labor and benefits costs; price increases; interest rates; and the overall economy and inflation. Respondents in non-manufacturing industries expect that the prices they pay for materials and services will increase by 4 percent during 2007. They also forecast a 3.9 percent increase in their overall labor and benefit costs for 2007. Profit margins are reported to have slightly increased in the second and third quarters of 2006, and respondents expect them to be slightly better between now and April 2007. Survey respondents indicate they have achieved an average of 52.2 percent of potential benefits from application of technology to supply chains and that the increased utilization of technology and e-business applications is their number one means of improving supply chains in 2007. Other improvement approaches include: supplier consolidation; strategic sourcing; professional development and education; and improvements in supply management processes."


OPERATING RATE

Manufacturing

Manufacturing purchasing and supply executives report that their companies are currently operating at 84.5 percent of normal capacity. This is a decrease when compared to April 2006 (85.6 percent) and less than the rate reported in December 2005 (85.3 percent). Recent monthly data from the Manufacturing ISM Report On Business® indicates the manufacturing sector concluded 41 consecutive months of growth in November 2006. The following nine industries are operating at or above the average capacity of 84.5 percent: Paper Products; Primary Metals; Textile Mills; Electrical Equipment, Appliances & Components; Furniture & Related Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Transportation Equipment; and Computer & Electronic Products.

Non-Manufacturing

Non-manufacturing supply executives report that their organizations are currently operating at 86.3 percent of normal capacity. This is slightly lower than the 88.4 percent reported in April 2006, and slightly lower than the 87 percent reported in December 2005. Considering production capacity increases reported in the following section of this forecast, this indicates that non-manufacturing industries are continuing to add capacity, but also find it necessary to maintain their utilization of capacity at a relatively high level. The following industries are operating at or above the average capacity level of 86.3 percent: Information; Mining; Health Care & Social Assistance; Educational Services; Management of Companies & Support Services; Public Administration; Real Estate, Rental & Leasing; Finance & Insurance; Transportation & Warehousing; and Wholesale Trade.

Operating Rate
  Manufacturing Non-Manufacturing
  Dec
2005
April
2006
Dec
2006
Dec
2005
April
2006
Dec
2006
90%+ 47% 49% 42% 53% 53% 56%
50%-89% 51% 49% 56% 46% 47% 43%
Below 50% 2% 2% 2% 1% 0% 1%
Est. Overall Average 85.3% 85.6% 84.5% 87.0% 88.4% 86.3%


PRODUCTION CAPACITY

Manufacturing

Production capacity in manufacturing increased 2.7 percent in 2006 as 44 percent of purchasing and supply executives reported an average capacity increase of 9.8 percent, 13 percent reported decreases averaging 11.8 percent, and 43 percent reported no change. This compares to a predicted increase of 5.6 percent for 2006 made in April 2006. Expectations for 2007 are for an increase of 5.4 percent. The following eight industries report at or above the average 2.7 percent increase in 2006: Primary Metals; Textile Mills; Furniture & Related Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; Machinery; and Transportation Equipment.

Manufacturing Production Capacity
  For 2006 For 2006 For 2007
  Predicted
April 2006
Magnitude
of Change
Reported
Dec 2006
Magnitude
of Change
Predicted
Dec 2006
Magnitude
of Change
Higher 46% + 14.2% 44% + 9.8% 53% + 11.0%
Same 49% NA 43% NA 42% NA
Lower 5% - 19.4% 13% - 11.8% 5% - 10.1%
Net Average   + 5.6%   + 2.7%   + 5.4%

The principal means of achieving increases in production capacity in 2006 were (in order of importance):

  1. Additional plant and/or equipment
  2. More hours worked with existing personnel
  3. Additional personnel (permanent or temporary or contract)
  4. Replaced equipment with technically advanced equipment
  5. More shifts worked with existing personnel
  6. Fewer plant shutdowns of operations or facilities
Non-Manufacturing

The capacity to produce products or provide services in the non-manufacturing sector increased 3 percent during 2006. This is slightly less than the 2.9 percent increase reported in December 2005 for 2005, and is less than the prediction in April 2006 of a 5.5 percent increase in 2006. For 2007 a larger increase (6.2 percent) is predicted. For 2006, 42 percent of non-manufacturing supply managers indicate increases averaging 7.4 percent, and 2 percent of respondents indicate decreases averaging 7.5 percent. Fifty-six percent see no change in their capacity. The industries reporting increases of more than the 3 percent average increase in capacity in 2006 are: Mining; Other Services**; Wholesale Trade; Construction; Management of Companies & Support Services; Educational Services; Finance & Insurance; and Professional, Scientific & Technical Services.

Non-Manufacturing Production or Provision Capacity
  For 2006 For 2006 For 2007
  Predicted
April 2006
Magnitude
of Change
Reported
Dec 2006
Magnitude
of Change
Predicted
Dec 2006
Magnitude
of Change
Higher 48% + 12.0% 42% + 7.4% 51% + 12.8%
Same 49% NA 56% NA 45% NA
Lower 3% - 9.8% 2% - 7.5% 4% - 9.5%
Net Average   + 5.5%   + 3.0%   + 6.2%

The principal means of achieving increases in production capacity in 2006 were (in order of importance):

  1. Additional personnel (permanent or temporary or contract)
  2. Replaced equipment with technically advanced equipment
  3. Additional plant and/or equipment
  4. More hours worked with existing personnel
  5. More shifts worked with existing personnel
  6. Fewer plant shutdowns of operations or facilities

CAPITAL EXPENDITURES — 2006 vs. 2005

Manufacturing

Purchasing and supply managers report 2006 capital expenditures rose 7.3 percent when compared to 2005 levels. The showing for 2006 does exceed survey respondents' expectations as they predicted an increase of 6.1 percent for 2006 in April 2006. The 45 percent of purchasers who reported increased capital expenditures in 2006 indicated an average increase of 25.4 percent, while the 13 percent who said their capital spending was reduced reported an average decrease of 31 percent. Forty-two percent said they spent the same in 2006 as in 2005. Industries showing the largest increases in capital expenditures for 2006 — in order of percentage increase — are: Primary Metals; Nonmetallic Mineral Products; Plastics & Rubber Products; Miscellaneous Manufacturing*; and Furniture & Related Products.

Non-Manufacturing

Non-manufacturing supply management executives report their level of capital expenditures in 2006 compared to 2005 rose by 9.9 percent. This is greater than the 7.8 percent increase predicted by respondents in April 2006, and is also larger than the 5.3 percent increase reported for 2005 one year ago. Fifty-three percent of respondents report increases averaging 24.1 percent. An additional 15 percent report decreases averaging 20 percent. However, another 32 percent indicate they spent the same on capital expenditures in 2006 as in 2005. Industries experiencing above average increases in capital expenditures in 2006 are: Retail Trade; Educational Services; Transportation & Warehousing; Utilities; Wholesale Trade; and Management of Companies & Support Services.

Capital Expenditures 2006 vs. 2005
  Manufacturing Non-Manufacturing
  Predicted
April 2006
Reported
Dec 2006
Magnitude
of Change
Predicted
April 2006
Reported
Dec 2006
Magnitude
of Change
Higher 38% 45% + 25.4% 42% 53% + 24.1%
Same 46% 42% NA 44% 32% NA
Lower 16% 13% - 31% 14% 15% - 20%
Net Average     + 7.3%     + 9.9%


PREDICTED CAPITAL EXPENDITURES — 2007 vs. 2006

Manufacturing

Purchasing and supply executives expect capital expenditures to rise 8.5 percent in 2007. The 44 percent of respondents who predict increased capital expenditures in 2007 indicate an average increase of 27.8 percent, while the 17 percent who said their capital spending would be reduced predict an average decrease of 22.5 percent; 39 percent said they expect to spend the same in 2007 as in 2006. Industries predicting the largest increases in capital expenditures for 2007 — in order of percentage increase — are: Primary Metals; Fabricated Metal Products; Machinery; Chemical Products; and Food, Beverage & Tobacco Products.

Non-Manufacturing

Non-manufacturing purchasing and supply executives are expecting a slightly lower increase (8.2 percent) in capital expenditures than they are reporting for 2006 (9.9 percent). The 50 percent of respondents expecting to spend more predict an average increase of 24.5 percent. An additional 16 percent anticipate a decrease averaging 27.1 percent. Thirty-four percent expect to spend the same on capital expenditures in 2007 as in 2006. Industries expecting above average increases in capital expenditures in 2007 are: Utilities and Educational Services.

Predicted Capital Expenditures 2007 vs. 2006
  Manufacturing Non-Manufacturing
  Predicted
Dec 2006
Magnitude
of Change
Predicted
Dec 2006
Magnitude
of Change
Higher 44% + 27.8% 50% + 24.5%
Same 39% NA 34% NA
Lower 17% - 22.5% 16% - 27.1%
Net Average   + 8.5%   + 8.2%


PRICES — Changes Between End of 2005 and End of 2006

Manufacturing

After an initial forecast in April 2006 of a 4.2 percent increase in prices paid, survey respondents now report realized price increases averaging 5.5 percent for the year. The 79 percent who say their prices are higher now than at the end of 2005 report an average increase of 7.5 percent, while the 10 percent who report lower prices averaged a 4.2 percent decrease. The remaining 11 percent indicate no change between the end of 2005 and the end of 2006. Industries experiencing higher-than-average price increases are: Primary Metals; Plastics & Rubber Products; Fabricated Metal Products; Furniture & Related Products; Nonmetallic Mineral Products; Paper Products; Electrical Equipment, Appliances & Components; and Food, Beverage & Tobacco Products.

Manufacturing Price Changes Between End of 2005 and End of 2006
  Predicted
Dec 2005
Magnitude
of Change
Predicted
April 2006
Magnitude
of Change
Reported
Dec 2006
Magnitude
of Change
Higher 71% + 6.7% 74% + 6.7% 79% + 7.5%
Same 11% NA 14% NA 11% NA
Lower 18% - 5.4% 12% - 5.6% 10% - 4.2%
Net Average   + 3.8%   + 4.2%   + 5.5%

Non-Manufacturing

As 2006 draws to a close, non-manufacturing supply managers report prices they pay have increased by 2.4 percent over the entire year. This is less than the 5.3 percent increase they predicted in April 2006, and less than the 5.3 percent increase also reported one year ago for 2005. Seventy-one percent of purchasers report price increases averaging 7.6 percent. Eleven percent of purchasers indicate decreased prices with an average reduction of 28 percent, and 18 percent of respondents have not experienced overall price change this year. Industries reporting above average rates of price increases in 2006 are: Educational Services; Utilities; Real Estate, Rental & Leasing; Wholesale Trade; Mining; Arts, Entertainment & Recreation; Construction; Other Services**; Public Administration; Agriculture, Forestry, Fishing & Hunting; Professional, Scientific & Technical Services; and Management of Companies & Support Services.

Non-Manufacturing Price Changes Between End of 2005 and End of 2006
  Predicted
Dec 2005
Magnitude
of Change
Predicted
April 2006
Magnitude
of Change
Reported
Dec 2006
Magnitude
of Change
Higher 73% + 6.3% 76% + 7.8% 71% + 7.6%
Same 18% NA 16% NA 18% NA
Lower 9% - 6.5% 8% - 8.0% 11% - 28%
Net Average   + 4.0%   + 5.3%   + 2.4%


PRICES — Predicted Changes Between End of 2006 and April 2007

Manufacturing

Forty-nine percent of purchasing and supply managers expect the prices they pay to increase in the first part of 2007 by an average of 5.2 percent. At the same time, 21 percent anticipate decreases averaging 5.6 percent. Including the 30 percent who expect no change in prices in the first four months of 2007, purchasers expect the net average overall price change to increase 1.4 percent for the period. Seven industries predict above average increases in prices paid for the first part of 2007: Primary Metals; Food, Beverage & Tobacco Products; Chemical Products; Electrical Equipment, Appliances & Components; Nonmetallic Mineral Products; Transportation Equipment; and Paper Products.

Non-Manufacturing

Non-manufacturing survey respondents predict that their purchases in the first four months of 2007 will cost an average of 3.1 percent more than at the end of 2006. This is more than the increase reported in the preceding section for all of 2006. Considering the prediction of price change for all of 2007 in the next section, purchasing and supply executives apparently expect most of 2007's price increase to occur in the first part of the year. Sixty-four percent of non-manufacturing respondents predict the prices they pay will increase an average of 5.4 percent in the first part of 2007. Also, 9 percent expect price decreases averaging 4.1 percent. The remaining 27 percent indicate no change in prices in the first four months of 2007. Industries predicting above average increases in prices they expect to pay in the first part of 2007 are: Arts, Entertainment & Recreation; Educational Services; Utilities; Real Estate, Rental & Leasing; Wholesale Trade; Public Administration; Other Services**; and Retail Trade.

Prices — Predicted Changes Between End of 2006 and April 2007
  Manufacturing Non-Manufacturing
  Predicted
Dec 2006
Magnitude
of Change
Predicted
Dec 2006
Magnitude
of Change
Higher 49% + 5.2% 64% + 5.4%
Same 30% NA 27% NA
Lower 21% - 5.6% 9% - 4.1%
Net Average   + 1.4%   + 3.1%


PRICES — Predicted Changes Between End of 2006 and End of 2007

Manufacturing

The forecast indicates respondents predict a net average increase of 1.1 percent between December 2006 and December 2007, indicating they expect price increases to moderate during the period of April 2007 through December 2007 at a rate of -0.3 percent. Fifty-five percent of respondents expect an average price increase of 5.2 percent, while 26 percent expect an average decline of 6.9 percent. The remaining 19 percent expect no change in their average prices paid for the year. Industries expecting to pay above average prices by the end of 2007 are: Primary Metals; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; Paper Products; Computer & Electronic Products; Plastics & Rubber Products; Transportation Equipment; Chemical Products; and Machinery.

Non-Manufacturing

For all of 2007, non-manufacturing supply management executives expect their prices to rise an average of 4 percent. Seventy-five percent of respondents expect increases averaging 6.1 percent, 9 percent anticipate prices to drop an average of 5.9 percent, and 16 percent foresee no change in prices during the next year. Industries expecting to pay above average price increases by the end of 2007 are: Utilities; Arts, Entertainment & Recreation; Wholesale Trade; Educational Services; Public Administration; Mining; and Retail Trade.

Predicted Price Changes Between End of 2006 and End of 2007
  Manufacturing Non-Manufacturing
  Predicted
Dec 2006
Magnitude
of Change
Predicted
Dec 2006
Magnitude
of Change
Higher 55% + 5.2% 75% + 6.1%
Same 19% NA 16% NA
Lower 26% - 6.9% 9% - 5.9%
Net Average   + 1.1%   + 4.0%


LABOR AND BENEFIT COSTS — Predicted Rate Change End of 2006 vs. End of 2007

Manufacturing

Purchasing and supply executives expect higher overall labor and benefit costs for 2007. Seventy-five percent of respondents expect increased labor and benefit costs and expect them to grow by an average of 3.9 percent for all of 2007, while the 8 percent forecasting lower costs see them decreasing by an average of 7.1 percent. Considering the 17 percent of respondents who believe costs will remain stable, the expected overall net rate of increase is 2.5 percent between the end of 2006 and the end of 2007. Industries expecting to pay 2.5 percent or higher are: Primary Metals; Paper Products; Furniture & Related Products; Textile Mills; Plastics & Rubber Products; Printing & Related Support Activities; Miscellaneous Manufacturing*; and Wood Products.

Non-Manufacturing

Supply executives' expectation for change in labor and benefit costs for non-manufacturing industries in 2007 is an increase of 3.9 percent. Eighty-two percent of respondents expect such costs to increase by an average of 5.3 percent. Another 5 percent of respondents expect labor and benefit costs to shrink by an average of 6.8 percent, and 13 percent believe costs will remain stable during 2007. Industries expecting average or above increases in labor and benefit costs in 2007 over 2006 are: Other Services**; Retail Trade; Educational Services; Finance & Insurance; Construction; Agriculture, Forestry, Fishing & Hunting; and Utilities.

Labor and Benefit Costs — Predicted Rate Change End of 2007 vs. End of 2006
  Manufacturing Non-Manufacturing
  Predicted
for 2006
Dec 2005
Predicted
for 2007
Dec 2006
Magnitude
of Change
Predicted
for 2006
Dec 2005
Predicted
for 2007
Dec 2006
Magnitude
of Change
Higher 81% 75% + 3.9% 73% 82% + 5.3%
Same 15% 17% NA 23% 13% NA
Lower 4% 8% - 7.1% 4% 5% - 6.8%
Net Average     + 2.5%     + 3.9%


EMPLOYMENT

Change in Overall Employment

Manufacturing

ISM's Manufacturing Business Survey Committee members forecast that manufacturing employment will increase by 0.1 percent in 2007. Thirty-one percent expect employment to be 7.2 percent higher while 25 percent predict employment to be lower by 8.7 percent. The remaining 44 percent of respondents expect their employment levels to be unchanged in 2007. The nine industries predicting 0.1 percent growth or greater in employment are: Primary Metals; Fabricated Metal Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Miscellaneous Manufacturing*; Electrical Equipment, Appliances & Components; Paper Products; and Chemical Products.

Non-Manufacturing

ISM's Non-Manufacturing Business Survey Committee members report that non-manufacturing employment has increased 1 percent since April 2006. Looking ahead to 2007, they forecast that employment will increase 1.6 percent by the end of 2007. For 2007, 43 percent of respondents expect higher levels of employment, 15 percent anticipate lower levels, and 42 percent expect their employment levels to be unchanged. Industries anticipating above average increases in their employment in 2007 are: Retail Trade; Other Services**; Finance & Insurance; Educational Services; Health Care & Social Assistance; and Wholesale Trade.

Predicted Change in Overall Employment in 2007
  Manufacturing Non-Manufacturing
  Predicted
For 2007
Dec 2006
Nominal %
Change
Predicted
For 2007
Dec 2006
Nominal %
Change
Higher 31% + 7.2% 43% + 6.9%
Same 44% NA 42% NA
Lower 25% - 8.7% 15% - 8.9%
Net Average   + 0.1%   + 1.6%
Diffusion Index 53%   64%  

Note: A diffusion index above 50 percent would generally indicate an expectation of higher employment; below 50 percent, an expectation of lower employment.


EXPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2007)

Manufacturing

The responses for this semiannual report indicate purchasers are optimistic about new export orders for the first half of 2007. This is consistent with the most recent ISM New Export Orders Index data in the monthly Manufacturing ISM Report On Business®, which has shown a significant rate of growth in new export orders. Of the 81 percent of respondents who export, 54 percent predict an increase (45 percent moderate and 9 percent substantial) over the next half year. Additionally, 3 percent of respondents (3 percent moderate and 0 percent substantial) predict a decrease in their exports, and 43 percent anticipate no change in exports over the next half year. Seven industries expect above average growth in exports: Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Furniture & Related Products; Computer & Electronic Products; Chemical Products; Miscellaneous Manufacturing*; and Transportation Equipment.

Non-Manufacturing

For the first half of 2007, non-manufacturing supply managers who report that their organizations engage in exporting feel more optimistic than they did one year ago concerning their export business. Of the 20 percent of non-manufacturing business survey respondents who report that they export, 50 percent predict an increase (46 percent moderate and 4 percent substantial) over the next half year. No respondents expect a decrease in their exports (0 percent moderate and 0 percent substantial), and 50 percent anticipate no change in exports over the next half year. Of the industries that report they export, the following expect growth in export business in the first half of 2007: Finance & Insurance; Professional, Scientific & Technical Services; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; and Retail Trade.

Predicted Change in Export Business — Next Half Year
  Manufacturing Non-Manufacturing
  For 2006 For 2007 For 2006 For 2007
  First Half
of 2006
Predicted
Dec 2005
First Half
of 2007
Predicted
Dec 2006
First Half
of 2006
Predicted
Dec 2005
First Half
of 2007
Predicted
Dec 2006
Substantial Increase 8% 9% 0% 4%
Moderate Increase 48% 45% 52% 46%
No Change 38% 43% 42% 50%
Moderate Decrease 5% 3% 6% 0%
Substantial Decrease 1% 0% 0% 0%
Diffusion Index 75% 75.5% 73% 75%


IMPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2007)

Manufacturing

Purchasers expect continued growth in imports in the first half of 2007. Of the 89 percent of purchasers who reported they import, 46 percent predict an increase in their imports over the next half year (34 percent moderate and 12 percent substantial), while 10 percent predict a decrease in imports of materials (9 percent moderate and 1 percent substantial). Almost half of survey respondents (44 percent) expect no change in imports. Industries expecting above average growth in imports are: Printing & Related Support Activities; Nonmetallic Mineral Products; Machinery; Miscellaneous Manufacturing*; Furniture & Related Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; and Computer & Electronic Products.

Non-Manufacturing

Non-manufacturers have higher expectations for use of imports for the first half of 2007 than they did in December 2005 for the first half of 2006. Of the 39 percent of non-manufacturing organizations who reported they import, 61 percent (52 percent moderate and 9 percent substantial) predict an increase in their imports during the first half of 2007. No respondents (0 percent moderate and 0 percent substantial) predict a decrease in imports of materials and services. The remaining 39 percent of purchasers expect no change in imports over the next half year. Industries expecting growth in imports are: Accommodation & Food Services; Finance & Insurance; Agriculture, Forestry, Fishing & Hunting; Construction; Transportation & Warehousing; Retail Trade; Wholesale Trade; Educational Services; Information; Management of Companies & Support Services; Utilities; and Professional, Scientific & Technical Services.

Predicted Change in Import Business — Next Half Year
  Manufacturing Non-Manufacturing
  For 2006 For 2007 For 2006 For 2007
  First Half
of 2006
Predicted
Dec 2005
First Half
of 2007
Predicted
Dec 2006
First Half
of 2006
Predicted
Dec 2005
First Half
of 2007
Predicted
Dec 2006
Substantial Increase 11% 12% 13% 9%
Moderate Increase 51% 34% 37% 52%
No Change 31% 44% 45% 39%
Moderate Decrease 6% 9% 3% 0%
Substantial Decrease 1% 1% 2% 0%
Diffusion Index 77.5% 68% 72.5% 80.5%


BUSINESS REVENUES

Business Revenues Comparison — 2006 vs. 2005

Manufacturing

Summarizing revenues for 2006, 66 percent say revenue was better than 2005, and that their nominal (before adjusting for inflation) revenues increased an average of 12.4 percent over 2005. Conversely, 19 percent say their nominal revenues decreased in 2006 by an average of 10.5 percent, and the remaining 15 percent indicate no change. Purchasing and supply executives indicate an overall net nominal increase of 6.2 percent in business revenues for 2006 over 2005. This is lower than the 6.6 percent increase that was forecast in April 2006 for all of 2006, and higher than the 5.4 percent increase predicted in December 2005 for all of 2006. Industries reporting above average increases in revenues in 2006 are: Primary Metals; Electrical Equipment, Appliances & Components; Machinery; Miscellaneous Manufacturing*; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Transportation Equipment.

Manufacturing Business Revenues — 2006 vs. 2005
  Predicted
Dec 2005
Nominal
% Change
Predicted
April 2006
Nominal
% Change
Reported
Dec 2006
Nominal
% Change
Higher 75% + 9.4% 72% + 10.2% 66% + 12.4%
Same 17% NA 19% NA 15% NA
Lower 8% - 19.8% 9% - 9.5% 19% - 10.5%
Net Average   + 5.4%   + 6.6%   + 6.2%

Non-Manufacturing

Non-manufacturing supply management executives report that business revenues for 2006 are improved over 2005 by 7.7 percent. This is slightly higher than the 6 percent increase predicted in April 2006 for 2006, but somewhat lower than the 7.3 percent increase reported one year ago for 2005 revenues over 2004 revenues. The 70 percent of respondents reporting better business in 2006 than in 2005 estimate an average nominal (before adjusting for inflation) revenue increase of 12.5 percent. This is in contrast to an average nominal decrease of 7.9 percent reported by the 12 percent who indicate worse business in 2006. The remaining 18 percent have experienced no change in 2006. Industries reporting above average increases in revenues in 2006 are: Wholesale Trade; Professional, Scientific & Technical Services; Construction; Educational Services; Transportation & Warehousing; and Finance & Insurance.

Non-Manufacturing Business Revenues — 2006 vs. 2005
  Predicted
Dec 2005
Nominal
% Change
Predicted
April 2006
Nominal
% Change
Reported
Dec 2006
Nominal
% Change
Higher 74% + 9.4% 68% + 10.7% 70% + 12.5%
Same 22% NA 25% NA 18% NA
Lower 4% - 6.6% 7% - 17.1% 12% - 7.9%
Net Average   + 6.6%   + 6.0%   + 7.7%

Business Revenues Prediction for 2007

Manufacturing

Purchasers forecast that 2007 will be better than 2006. The 72 percent of respondents forecasting better business in 2007 than in 2006 estimate an average nominal (before adjusting for inflation) increase of 10.7 percent in their organizations' revenues. This is in contrast to an average nominal decrease of 12.7 percent forecast by the 11 percent who predict worse business in 2007. Including the 17 percent who see no change in 2007, the forecast for overall net nominal growth in business revenues for 2007 over 2006 is 6.4 percent. The industries predicting a greater than average increase in nominal revenues in 2007 are: Chemical Products; Transportation Equipment; Primary Metals; Food, Beverage & Tobacco Products; Computer & Electronic Products; Miscellaneous Manufacturing*; and Electrical Equipment, Appliances & Components.

Non-Manufacturing

Non-manufacturing survey respondents forecast that business revenues for 2007 will be improved over 2006 by an average of 6.4 percent. This is lower than the 7.7 percent increase reported for 2006, but higher than the 5.8 percent increase reported one year ago for 2005 revenues over 2004 revenues. The 72 percent of respondents forecasting better business in 2007 than in 2006 estimate an average nominal (before adjusting for inflation) revenue increase of 9.8 percent. This is in contrast to an average nominal decrease of 10.9 percent forecast by the 6 percent who predict worse business in 2007. The remaining 22 percent see no change in 2007. Industries expecting above average increases in revenues in 2007 are: Mining; Professional, Scientific & Technical Services; Wholesale Trade; Transportation & Warehousing; Educational Services; and Information.

Business Revenues — 2007 vs. 2006
  Manufacturing Non-Manufacturing
  Predicted
Dec 2006
Nominal
% Change
Predicted
Dec 2006
Nominal
% Change
Higher 72% + 10.7% 72% + 9.8%
Same 17% NA 22% NA
Lower 11% - 12.7% 6% - 10.9%
Net Average   + 6.4%   + 6.4%


PROFIT MARGINS

Manufacturing

Survey respondents report that profit margins have stayed the same on average during the second and third quarters of 2006 as 36 percent experienced an increase in profit margins, an almost equal number (35 percent) had lower margins, and 29 percent reported no change. However, expectations are for improvement between now and April of 2007 as 43 percent predict better profits margins, 23 percent predict lower profit margins, and 34 percent predict no change.

Non-Manufacturing

Non-manufacturing supply management executives were asked about changes in profit margins that their organizations recently experienced or were expecting in the near future. Their responses indicate that 35 percent experienced an increase in profit margins during the second and third quarters of 2006, while 23 percent found smaller profit margins and 42 percent had no change in margins during the same period. Looking ahead from now through April 2007, 29 percent of supply managers expect improved profit margins, only 13 percent expect lower profit margins, and the remaining 58 percent of respondents anticipate no change in their profit margins.

Profit Margins
  Manufacturing Non-Manufacturing
  Apr 2006
through
Sep 2006
Reported
Dec 2006
Nov 2006
through
Apr 2007
Predicted
Dec 2006
Apr 2006
through
Sep 2006
Reported
Dec 2006
Nov 2006
through
Apr 2007
Predicted
Dec 2006
Better 36% 43% 35% 29%
Same 29% 34% 42% 58%
Worse 35% 23% 23% 13%
Diffusion Index 50.5% 60% 56% 58%


BUSINESS COMPARISON

The First Half of 2007 with Last Half of 2006

Manufacturing

Looking ahead to the first half of 2007, survey respondents are optimistic about the next half year. Comparing their outlook for the first half of 2007 to the last half of 2006, 41 percent predict it will be better, 24 percent predict it will be worse, and 35 percent expect no change. Compared to the diffusion index for the same relative prediction one year ago (70 percent), respondents are less optimistic about prospects in the manufacturing sector for the first half year (58.5 percent). The industries expecting above average optimism are: Miscellaneous Manufacturing*; Chemical Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Wood Products; Computer & Electronic Products; Primary Metals; and Machinery.

Non-Manufacturing

The first half of 2007 is predicted to be stronger than the last half of 2006, according to non- manufacturing purchasing and supply managers. The diffusion index indicating current expectations is 66.5 percent. Forty-four percent of respondents expect the first half of next year to be better than the last half of this year, 11 percent anticipate it will be worse, and 45 percent predict no change. The industries expecting the most improvement in the first half of 2007 are: Transportation & Warehousing; Health Care & Social Assistance; Wholesale Trade; Information; Management of Companies & Support Services; Other Services**; Real Estate, Rental & Leasing; Finance & Insurance; and Utilities.

Business — First Half 2007 vs. Last Half 2006
  Manufacturing Non-Manufacturing
  Predicted
Dec 2006
Predicted
Dec 2006
Better 41% 44%
Same 35% 45%
Worse 24% 11%
Diffusion Index 58.5% 66.5%

Note: A diffusion index above 50 percent would generally indicate an expectation of the first half of the coming year being better than the second half of the current year.

The Second Half of 2007 with the First Half of 2007

Manufacturing

Purchasing and supply executives are more optimistic about the second half of 2007 compared to the first half of the year. The percentage of survey respondents who forecast the second half of 2007 to be better than the first half is 48 percent, while 10 percent expect it to be worse, and 42 percent expect no change. The industries predicting the largest rate of improvement in the second half of 2007 are: Textile Mills; Miscellaneous Manufacturing*; Printing & Related Support Activities; Nonmetallic Mineral Products; Fabricated Metal Products; Computer & Electronic Products; Transportation Equipment; and Paper Products.

Non-Manufacturing

Comparing the second half of 2007 to the first half, non-manufacturing purchasing and supply executives feel more optimistic than they do for the first half of the year compared to the last half of 2006 (diffusion index of 70.5 percent compared to 66.5 percent). The percentage of respondents who currently forecast the second half of 2007 to be better than the first half is 46 percent, while 5 percent expect it to be worse. An additional 49 percent of purchasers expect no change. The industries expecting the greatest improvement in the second half of the year are: Transportation & Warehousing; Construction; Accommodation & Food Services; Information; Retail Trade; Professional, Scientific & Technical Services; Utilities; Real Estate, Rental & Leasing; and Wholesale Trade.

Business — Second Half 2007 vs. First Half 2007
  Manufacturing Non-Manufacturing
  Predicted
Dec 2006
Predicted
Dec 2006
Better 48% 46%
Same 42% 49%
Worse 10% 5%
Diffusion Index 69% 70.5%

Note: A diffusion index above 50 percent would generally indicate an expectation of the second half of the coming year being better than the first half.


SUPPLY CHAIN PRACTICES IN 2007

Manufacturing

In response to a special question regarding supply chain optimization, 82 percent of purchasing and supply executives plan to take new steps in 2007 to improve their supply chain management practices. New or improved enterprise technology is at the top of the list for 2007.

The five most popular approaches are listed below:

  1. New or improved enterprise technology
  2. Improved supplier management practices
  3. Improved inventory management
  4. Increase low cost country sourcing
  5. Application of lean manufacturing concepts to supply chain
Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2007, 66 percent of respondents stated that they plan to take steps during the current year to improve their supply chain management practices. Survey respondents' first choice is an increased use of technology and e-business applications.

The five most popular approaches are listed below:

  1. Increased use of technology and e-business applications
  2. Supplier consolidation
  3. Strategic sourcing
  4. Professional development and education
  5. Improvements in supply management processes

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers will be decreasing inventory on hand to support their planned level of sales during 2007. In this forecast, 16 percent expect to increase their purchased inventory-to-sales ratio during 2007. This is in contrast to 27 percent who expect the ratio to decrease and 57 percent who predict no change.

Non-Manufacturing

Of the 56 percent of non-manufacturing purchasers who answered this question, 15 percent anticipate increasing their purchased inventory-to-sales ratio during 2007. An additional 13 percent expect their ratio to drop and 72 percent see no change. The diffusion index of 51 percent suggests continued building of inventories in 2007 at the same rate of increase as in 2006.

Predicted Change in Purchased Inventory-to-Sales Ratio
  Manufacturing Non-Manufacturing
  For 2006
Predicted
Dec 2005
For 2007
Predicted
Dec 2006
For 2006
Predicted
Dec 2005
For 2007
Predicted
Dec 2006
Greater 16% 16% 14% 15%
Same 61% 57% 74% 72%
Smaller 23% 27% 12% 13%
Diffusion Index 46.5% 44.5% 51% 51%

Note: A diffusion index above 50 percent would indicate an increase in the inventory-to-sales ratio; below 50 percent, a decrease in the ratio.


ECONOMIC CONCERNS

Manufacturing

Purchasers have a number of supply- and cost-related concerns on their list for 2007. The most frequently cited concerns are:

  1. Inflation
  2. Energy Cost and Supply
  3. Healthcare Costs
  4. China — Currency and Imports
  5. Labor and Benefits Costs
Non-Manufacturing

The number one economic concern of non-manufacturing supply management executives at the present time is energy, fuel and transportation costs. The most frequently cited concerns are:

  1. Energy, Fuel and Transportation Costs
  2. Overall Economy and Inflation
  3. Labor and Benefits Costs
  4. Interest Rates
  5. Price Increases

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Survey respondents are optimistic about the next 12 months, but not as bullish when compared to their response in December 2005. The 53 percent who report a better outlook is less than the 57 percent response received in December 2005. The 30 percent who report that the outlook is the same is down from the 35 percent reported in December 2005, and the 17 percent who indicated the outlook to be worse is higher than the 8 percent reported in December 2005.

Non-Manufacturing

Non-manufacturing survey respondents have a higher degree of optimism now than they had when they looked ahead in December 2005. The 50 percent who currently report a better outlook is higher than the 43 percent who had that outlook in December 2005, but lower than the 63 percent who had a better outlook in December 2004. Thirty-eight percent expect no change in the outlook, and 12 percent feel the outlook will be worse over the next 12 months.

Outlook — Next 12 Months
  Manufacturing Non-Manufacturing
  Predicted
for 2006
Dec 2005
Predicted
for 2007
Dec 2006
Predicted
for 2006
Dec 2005
Predicted
for 2007
Dec 2006
Better 57% 53% 43% 50%
Same 35% 30% 47% 38%
Worse 8% 17% 10% 12%
Diffusion Index 74.5% 68% 66.5% 69%


U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2007 — Manufacturing Only

Manufacturing

Purchasing and supply executives remain moderately optimistic concerning the prospective strength of the U.S. dollar for 2007. The average diffusion index for this forecast is 62.1 percent, stronger than the December 2005 forecast average of 59.6 percent. Of the seven currencies surveyed in the report, the U.S. dollar is expected to strengthen most against the Korean Won and the Mexican Peso.

U.S. Dollar Will Be: Euro Can.
$
British
Pound
Japanese
Yen
Mexican
Peso
Korean
Won
Taiwan
$
Stronger than 48% 34% 34% 37% 48% 42% 36%
Same as 30% 49% 48% 40% 38% 52% 53%
Weaker than 22% 17% 18% 23% 14% 6% 11%
Diffusion Index 63% 59% 58% 57% 67% 68% 63%

Note: A diffusion index above 50 percent would predict a generally stronger U.S. dollar; below 50 percent, a generally weaker U.S. dollar, with the distance from 50 percent indicative of the predicted strength or weakness.

Benefits of Applying Technology

Manufacturing

A special question was asked to determine the progress of organizations in achieving efficiencies from the application of technology to supply management. Respondents believe they are only 50 percent complete on average in achieving benefits from technology in their supply chain, indicating there is still significant improvement to be gained from the application of technology in manufacturers' supply chains.

Non-Manufacturing

Survey respondents were asked a special question concerning the realized proportion of potential supply chain efficiencies that could ultimately be gained from applying technology to their supply chain. The average response from non-manufacturing respondents was 52.2 percent, indicating that, on average, almost 48 percent of potential improvement is yet to be gained. While 31 percent of respondents have achieved at least 75 percent of their expected potential benefit, the remaining 69 percent still have significant benefits to gain.

Benefits of Applying Technology
% Benefits
Realized to Date
Manufacturing
% of Responses
Non-Manufacturing
% of Responses
90-100 5% 4%
75-89 20% 27%
50-74 37% 35%
Less than 50 38% 34%


SUMMARY

Manufacturing

The manufacturing sector is currently expanding, and the forecast indicates that it will continue to expand in 2007.

  • Operating rate is 84.5 percent.
  • Production capacity increased by 2.7 percent in 2006.
  • Production capacity is expected to increase by 5.4 percent in 2007.
  • Capital expenditures increased 7.3 percent in 2006.
  • Capital expenditures are expected to increase 8.5 percent in 2007.
  • Prices paid increased 5.5 percent in 2006.
  • Overall 2007 prices paid are expected to increase 1.1 percent.
  • Labor and benefit costs are expected to increase 2.5 percent in 2007.
  • Manufacturing employment is expected to increase 0.1 percent in 2007.
  • Expect strong growth in U.S. exports in 2007.
  • Expect strong growth in U.S. imports in 2007.
  • Manufacturing revenues (nominal) are up by 6.2 percent in 2006.
  • Manufacturing revenues (nominal) are expected to be up by 6.4 percent in 2007.
  • Major concerns to manufacturers: inflation; energy cost and supply; healthcare costs; China — currency and imports; and labor and benefits costs.
  • The U.S. dollar is expected to strengthen versus major trading partner currencies in 2007.
  • Overall attitude of manufacturing management: optimistic, with 53 percent indicating 2007 will be better than 2006.
Non-Manufacturing

The non-manufacturing sector continues to expand and the forecast indicates an increased rate of expansion in 2007.

  • Operating rate is currently 86.3 percent.
  • Production and provision capacity are expected to increase 6.2 percent in 2007.
  • Capital expenditures increased 9.9 percent in 2006.
  • Capital expenditures are expected to increase 8.2 percent in 2007.
  • Prices paid increased 2.4 percent during 2006.
  • Prices paid are expected to increase 4 percent during 2007.
  • Labor and benefit costs are expected to increase 3.9 percent during 2007.
  • Non-manufacturing employment is expected to increase 1.6 percent during 2007.
  • Expect strong export growth in 2007.
  • Expect strong import growth in 2007.
  • Non-manufacturing revenues (nominal) are up 7.7 percent in 2006.
  • Non-manufacturing revenues (nominal) are expected to rise 6.4 percent in 2007.
  • Major concerns to non-manufacturers: energy, fuel and transportation costs; overall economy and inflation; labor and benefits costs; interest rates; and price increases.
  • Overall attitude of non-manufacturing supply managers: optimistic.

*Miscellaneous items include products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies.

**Other Services include equipment and machinery repairing; promoting or administering religious activities; grant making; advocacy; and providing dry-cleaning and laundry services, personal care services, death care services, pet care services, photofinishing services, temporary parking services, and dating services.

In addition to the forecast, the Manufacturing ISM Report On Business® is issued monthly and is considered by many economists to be the most reliable near-term economic barometer available. It is reviewed regularly by government agencies and economic business leaders. The report, compiled from responses to questions asked of purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, imports, exports, backlog of orders, employment, customers' inventories, 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 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.

The Manufacturing and Non-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.

The full text version of each report 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 December 2006 data will be released at 10:00 a.m. (ET) on Tuesday, January 2, 2007.

The next Non-Manufacturing ISM Report On Business® featuring the December 2006 data will be released at 10:00 a.m. (ET) on Thursday, January 4, 2007.



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