December 2002 Non-Manufacturing ISM Report On Business®

FOR RELEASE: January 6, 2002

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
Business Activity at 54.7%

DO NOT CONFUSE THIS NATIONAL NON-MANUFACTURING REPORT with the various regional purchasing and supply reports released across the country or the Manufacturing ISM Report On Business®. The national non-manufacturing report's information reflects the entire United States, while the regional reports cover only their local vicinity. Also, the information in the regional reports is not used in calculating the results of the national report. The information compiled in this report is for the month of December 2002.

New Orders, Prices, Order Backlogs, Exports, Imports Increase
Employment, Inventories Decrease

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in December 2002, 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 purchasing and supply management program, University of Houston-Downtown. "In December, non-manufacturing business activity increased for the 11th consecutive month. The reported growth indicates a slower rate of expansion than reported in November," Kauffman said. He added, "Also in December, New Orders grew at a slower rate than in November, and the Backlog of Orders Index indicated the fourth consecutive month of increase in order backlogs."

Reports from purchasing and supply executives indicate seven industry groups grew in December, six groups contracted, and four industry groups reported no change from November. Increased business activity in December was reported by 27 percent of members, compared to November's 30 percent. Reduced activity was reported by 24 percent of members compared to 17 percent in November. In December, the remaining 49 percent of members indicated no change in business activity, compared to 53 percent in November. The smaller numbers of respondents reporting increased activity and larger numbers reporting reduced activity reflects a slower rate of growth experienced by members overall in December. The Backlog of Orders Index in December increased by 1 percentage point to 51.5 percent, indicating that growth in business activity should continue for the immediate future. The December New Orders Index decreased from November's report but remained well within growth territory (above 50 percent) at 56.3 percent. With growth in business activity and new orders increasing at a slower rate than in November, members' general comments continue to be mixed. Their comments on general business conditions included: "The general building industry — commercial high rise and residential mid and high rise — is off considerably when compared with year ago work"; "We have branches in 14 major cities and these local economies are still slow and businesses in general are reluctant to spend money to upgrade infrastructure. However, a number of national retail and restaurant chains are upgrading for the future"; "The nursing home industry continues to suffer from cutbacks in Medicare/Medicaid funding"; and "Cautious optimism remains the rule. Expansion/investment in production continues in spite of some concerns about changes in healthcare funding in 2003."

In addition, Inventories decreased for the fifth month but at a slower rate of decrease than in November. Prices increased for the 10th month, also at a slower rate of increase than in November. New Export Orders and Imports both increased, while Employment shrank for the 22nd consecutive month but at a slower rate than in November. Supplier Deliveries indicated slower performance for the 16th consecutive month.

Significant reports of commodities in short supply or up or down in price in December indicate that intravenous solutions is the only item in short supply. Price increases are reported for blood; copper, copper fittings, copper tube; #2 diesel fuel; food products; food and beverage; gasoline; #2 heating oil; natural gas; paper products; power transmission items; produce; soyoil; steel, steel cans, steel products; and tomatoes. Price decreases are reported for beef; computer desktop hardware and PCs; computer related products; and gasoline.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index December
Index %
November
Index %
Index Change
from November
Direction &
Rate of Change
December
Index %
November
Index %
Index Change
from November
Business Activity / Production 54.7 57.4 -2.7 Increasing slower 55.6 54.6 +1.0
New Orders 56.3 58.0 -1.7 Increasing slower 63.3 49.9 +13.4
Employment 46.9 45.9 +1.0 Decreasing slower 47.4 43.8 +3.6
Supplier Deliveries 52.5 52.5 0.0 Decreasing at same rate 51.4 50.8 +0.6
Inventories 45.5 44.0 +1.5 Decreasing slower 46.2 42.1 +4.1
Prices 51.5 54.0 -2.5 Increasing slower 56.9 55.7 +1.2
Backlog of Orders 51.5 50.5 +1.0 Increasing faster 46.5 42.5 +4.0
New Export Orders 54.0 58.5 -4.5 Increasing slower 52.2 49.1 +3.1
Imports 51.8 55.1 -3.3 Increasing slower 55.3 53.1 +2.2
Inventory Sentiment 63.0 61.0 +2.0 Greater feeling of "too high" N/A    
Customers' Inventories N/A       43.0 46.5 -3.5

* Non-Manufacturing ISM Report On Business® data is seasonally adjusted for Business Activity, New Orders, Imports, and Employment. Manufacturing ISM Report On Business® data is seasonally adjusted except for Backlog of Orders and Customer Inventories.

Business Activity

ISM's Non-Manufacturing Business Activity Index in December decreased 2.7 percentage points on a seasonally adjusted basis to 54.7 percent from November's 57.4 percent. December's index indicates a drop in the rate of growth but extends to 11 the consecutive months of growth that began in February 2002. In December, seven sectors reported increased business activity, six sectors reported decreased activity, and four reported no change in activity compared to November.

The industries reporting the highest rates of growth of business activity in December are: Agriculture; Real Estate; Business Services; Health Services; and Retail Trade. The industries reporting the highest rates of contraction of business activity in December are: Wholesale Trade; Public Administration; Utilities; Construction; and Finance & Banking.

Business
Activity
% Higher % Same % Lower Index
December 2002 27 49 24 54.7
November 2002 30 53 17 57.4
October 2002 26 53 21 53.1
September 2002 32 49 19 53.9

New Orders

ISM's Non-Manufacturing New Orders Index declined to 56.3 percent in December from 58 percent in November. Comments from members include: "Increased sales"; "New customers"; "Annually December is a slower month, but will be better than last year. January through March looks very promising"; and "Budget constraints."

The industries reporting growth of new orders in December are: Health Services; Business Services; Agriculture; Retail Trade; Utilities; and Insurance. The industries reporting contraction of new orders in December are: Public Administration; Construction; Finance & Banking; and Wholesale Trade.

New
Orders
% Higher % Same % Lower Index
December 2002 27 49 24 56.3
November 2002 29 55 16 58.0
October 2002 26 49 25 50.9
September 2002 28 53 19 52.3

Employment

Employment in the non-manufacturing sector contracted in December for the 22nd consecutive month. ISM's Non-Manufacturing Employment Index for December is 46.9 percent compared to 45.9 percent in November. December's index indicates a slower rate of decrease compared to November. Comments from respondents include: "Continued outsourcing of functions"; "Layoffs due to slowdown in business and loss of access lines"; and "Replacing people with improved technology."

The industries reporting growth in employment in December are: Mining; Health Services; Finance & Banking; Retail Trade; and Insurance. Industries reporting the highest rates of reduction in employment in December are: Transportation; Utilities; Communication; Public Administration; and Other Services*.

Employment % Higher % Same % Lower Index
December 2002 14 64 22 46.9
November 2002 13 66 21 45.9
October 2002 12 67 21 46.2
September 2002 13 65 22 46.6

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 16th consecutive month in December. The index registered 52.5 percent, the same value as in November. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in December include: "Our suppliers generally are busy"; "Suppliers appear to be cutting inventories"; "Winter weather slowing transit and unloading times"; and "Small spike in demand caught suppliers by surprise."

The industries that reported the highest rates of slowing in supplier deliveries in December are: Utilities; Entertainment; Transportation; Mining; and Wholesale Trade. Industries reporting faster supplier deliveries in December are: Communication; Construction; Health Services; and Business Services.

Supplier
Deliveries
% Slower % Same % Faster Index
December 2002 10 85 5 52.5
November 2002 9 87 4 52.5
October 2002 9 89 2 53.5
September 2002 9 87 4 52.5

Inventories

ISM's Non-Manufacturing Inventories Index registered 45.5 percent in December, 1.5 percentage points higher than the 44 percent reported in November. December's index means that material inventories maintained by non-manufacturing organizations decreased for the fifth consecutive month but at a slower rate of decrease than in November. Of the total respondents in December, 29 percent indicate they do not have inventories or do not measure them. Comments from members include: "Transfers of excess rather than buying new; "Slowly using old stock"; "Reducing slower moving stock and adjusting other levels to current market conditions"; "Using inventory funds for other operating expenses"; and "Major effort to reduce inventory."

The industries reporting inventory increases in December are: Agriculture; Entertainment; Health Services; Retail Trade; and Utilities. Industries reporting the highest rates of inventory decrease in December are: Construction; Public Administration; Mining; Business Services; Wholesale Trade; and Finance & Banking.

Inventory
Change
% Higher % Same % Lower Index
December 2002 18 55 27 45.5
November 2002 15 58 27 44.0
October 2002 16 56 28 44.0
September 2002 14 61 25 44.5

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased for the 10th consecutive month in December. ISM's Non-Manufacturing Prices Index for December is 51.5 percent, a drop from the 54 percent registered for November. In December, the percentage of members reporting higher prices declined four percentage points to 14 percent from 18 percent in November, the proportion indicating no change rose three percentage points to 75 percent, and the number who noted lower prices increased 1 percentage point in December to 11 percent.

The industries reporting the highest rates of increase in prices paid in December are: Business Services; Entertainment; Mining; Other Services*; Wholesale Trade; and Retail Trade. The industries reporting price decreases in December are: Agriculture; Real Estate; Insurance; Communication; and Finance & Banking.

Prices % Higher % Same % Lower Index
December 2002 14 75 11 51.5
November 2002 18 72 10 54.0
October 2002 16 76 8 54.0
September 2002 15 75 10 52.5

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 51.5 percent in December. This is the fourth consecutive month of increase in order backlogs. The December index is an increase of 1 percentage point from November's 50.5 percent, indicating a higher rate of increase than in November. Of the total respondents in December, 41 percent indicated they do not measure backlog of orders. Purchasing and supply executives' comments on backlogs of orders include: "Increase in supplier out-of-stocks and national recalls"; "Slower deliveries from vendor"; "Material backorders from suppliers"; and "Suppliers reducing inventory for year end."

The industries reporting the highest rates of growth of backlog of orders in December are: Real Estate; Entertainment; Business Services; Utilities; Mining; and Other Services*. The industries reporting decline of order backlogs in December are: Transportation; Agriculture; Finance & Banking; Wholesale Trade; Health Services; and Construction.

Backlog
of Orders
% Higher % Same % Lower Index
December 2002 18 67 15 51.5
November 2002 15 71 14 50.5
October 2002 19 66 15 52.0
September 2002 15 72 13 51.0

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 grew in December for the second consecutive month. The New Export Orders Index for December is 54 percent compared to November's 58.5 percent, indicating a slower rate of growth than in November. Of the total respondents in December, 80 percent indicated they either do not perform, or do not separately measure, orders for work outside the United States.

The industries reporting increases in new export orders in December are: Business Services; Other Services*; and Mining. The only industry reporting a decrease in new export orders in December is Retail Trade.

New Export
Orders
% Higher % Same % Lower Index
December 2002 16 76 8 54.0
November 2002 26 65 9 58.5
October 2002 11 76 13 49.0
September 2002 24 67 9 57.5

Imports

In December, the ISM index indicating use of imported materials by non-manufacturing industries decreased from November's value, but still registered the third consecutive monthly increase in import activity. ISM's Non-Manufacturing Imports Index for December is 51.8 percent, a drop of 3.3 percentage points from the 55.1 percent reported in November. In December, 70 percent of respondents reported that they do not use or do not track use of imported materials.

The industries reporting increases in use of imports in December are: Business Services; Other Services*; and Wholesale Trade. The industries reporting decreased use of imports in December are Communication and Retail Trade.

Imports % Higher % Same % Lower Index
December 2002 7 86 7 51.8
November 2002 15 78 7 55.1
October 2002 20 67 13 54.9
September 2002 8 80 12 44.7

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in December registered 63 percent, 2.0 percentage points higher than the 61 percent reported for November. This indicates that non-manufacturing purchasing and supply executives felt a greater degree of discomfort with current high levels of inventory in December than they did during November. In December, 35 percent of respondents felt their inventories were too high, 9 percent indicated their inventories were too low, and 56 percent said that their inventories were about right.

The industries that reported the highest rates of feeling that their inventories were too high in December are: Legal Services; Insurance; Agriculture; Construction; Mining; and Transportation. The only industry that reported its inventories were too low in December is Other Services*.

Inventory
Sentiment
% Too High % About Right % Too Low Index
December 2002 35 56 9 63.0
November 2002 26 70 4 61.0
October 2002 34 61 5 64.5
September 2002 38 56 6 66.0

*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.

Commodities Reported in Short Supply

Intravenous Solutions.

Commodities Reported Up in Price

Blood; Copper, Copper Fittings, Copper Tube; #2 Diesel Fuel — 3rd month; Food Products — 2nd month; Food & Beverage; Gasoline* — 3rd month; #2 Heating Oil — 2nd month; Natural Gas; Paper Products; Power Transmission Items; Produce; Soyoil; Steel, Steel Cans, Steel Products; Tomatoes.

Commodities Reported Down in Price

Beef; Computer Desktop Hardware/PCs; Computer Related Products; Gasoline*.

*Reported as both up and down in price.

Data and Method of Presentation

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

The Non-Manufacturing ISM Report 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 world's leading educator of supply management professionals and is a valuable resource for decision makers in major markets, companies, and government.

The full text version of the Non-Manufacturing ISM Report 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 Report On Business® featuring the January 2003 data will be released at 10:00 a.m. (ET) on February 5, 2003.



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