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January 2005 Non-Manufacturing ISM Report On Business®

FOR RELEASE: February 3, 2005

Contact: Terri Tracey
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3071
  E-mail: ttracey@ism.ws
Business Activity at 59.2%

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 January 2005. This report reflects the U.S. Department of Commerce's recently completed annual adjustment to the seasonal factors used to calculate the indexes.

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

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in January 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 Purchasing and Supply Management Program, University of Houston-Downtown. "Non-manufacturing business activity increased for the 22nd consecutive month in January," Kauffman said. He added, "Business activity increased at a slower rate in January, as did new orders. The most troubling aspect of this month's report is the drop in backlog of orders, indicating the first reduction in order backlogs in 21 months. This implies that the capability to provide products and services in the non-manufacturing industries has risen faster than the increase in new orders."

Purchasing and supply executives report that business activity continued to increase in January in the non-manufacturing sector. The Business Activity Index for January is 59.2 percent, down 4.7 percentage points from December's seasonally adjusted 63.9 percent. January's index indicates continued growth across most non-manufacturing industries. In January, 11 industry groups reported growth, three indicated contraction, and two reported business unchanged from December. Increased business activity in January was reported by 29 percent of members, compared to 36 percent in December. Reduced activity was reported by 18 percent of members, compared to 14 percent in December. In January, the remaining 53 percent of members indicated no change in business activity, compared to 50 percent that reported no change in December.

The Backlog of Orders Index decreased significantly to 48 percent, indicating a decrease in order backlogs after growing for 20 consecutive months. The January New Orders Index decreased from a seasonally adjusted 61.3 percent in December to 60.5 percent. This indicates a slightly slower rate of increase of new orders in January compared to December. Members reported that the prices they pay increased in January for the 20th consecutive month, with a slower rate of increase than in December. January's Prices Index is 66.6 percent, a decrease of 7 percentage points from the 73.6 percent (seasonally adjusted) reported in December. This month, 37 percent of all respondents and 13 of 16 non-manufacturing industries reported paying higher prices compared to December. Many of members' comments regarding business in January indicate continued positive business conditions but with continued concern for inflationary pressures. Specific comments include: "We have begun to feel the effects of the projected inflation in many areas as prices are going up for a variety of commodities"; "Business is strong"; "Many new service requests in 2005"; "Sales continue to increase above budget and prior year, but costs are going up even more. Sales are up 9.4 percent above the prior year and 4.4 percent above budget"; "Seasonal business — slow start to new year, raw materials still high"; and "Cautious optimism on near-term economy tempered by fears of protracted war and associated costs, inflationary increases in fuel and interest rate surges."

In addition, Inventories decreased in January after two months of growth. With regard to Inventory Sentiment for January, members reported a slightly higher level of concern than in December that inventories are too high. New Export Orders increased for the 18th consecutive month and Imports increased for the 21st consecutive month. Employment increased for the 16th consecutive month. Supplier Deliveries indicated slower performance for the 41st consecutive month.

Significant reports of commodities in short supply or up or down in price in January indicate that dry wall and steel are in short supply. Price increases are reported for airfares; aluminum; beef; building materials; carpet; cheese; chemicals; chicken; class 8 trailers and trucks; copper; #2 diesel fuel; energy; food; fuel; fuel surcharges; gasoline; hardware; hotel costs; natural gas; paper/paper products; pine, spruce and treated lumber; plastic bags; plastic containers; plastic items; plastic resin; plastics; plywood; pork/pork trimmings; PVC; raw materials; roofing shingles; stainless steel; steel; steel products; and transportation/freight charges. Price decreases are reported for butter; computer hardware; diesel fuel; fuel; gasoline; soy oil; tomatoes; and unleaded gasoline.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index January
Index %
December
Index %
Index Change
from December
Direction &
Rate of Change
January
Index %
December
Index %
Index Change
from December
Business Activity / Production 59.2 63.9 -4.7 Increasing slower 57.8 56.7 +1.1
New Orders 60.5 61.3 -0.8 Increasing slower 56.5 62.6 -6.1
Employment 52.2 55.0 -2.8 Increasing slower 58.1 53.3 +4.8
Supplier Deliveries 52.5 55.5 -3.0 Slowing slower 53.7 56.1 -2.4
Inventories 49.5 56.0 -6.5 Decreasing from increasing 52.8 52.8 0.0
Prices 66.6 73.6 -7.0 Increasing slower 69.0 72.0 -3.0
Backlog of Orders 48.0 56.5 -8.5 Decreasing from increasing 50.5 54.0 -3.5
New Export Orders 52.5 55.5 -3.0 Increasing slower 56.9 59.1 -2.2
Imports 53.0 61.0 -8.0 Increasing slower 61.1 60.8 +0.3
Inventory Sentiment 64.5 64.0 +0.5 Greater feeling of "too high" N/A N/A N/A
Customers' Inventories N/A N/A N/A   44.5 44.0 +0.5

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

Business Activity

ISM's Non-Manufacturing Business Activity Index in January decreased to 59.2 percent from December's seasonally adjusted 63.9 percent, indicating a slower rate of growth of activity in January. This month, 11 sectors reported increased business activity, three reported decreased activity, and two reported unchanged activity compared to December.

The industries reporting the highest rates of growth of business activity in January are: Transportation; Health Services; Mining; Insurance; and Utilities. The industries reporting contraction of business activity in January are: Retail Trade; Business Services; and Entertainment.

Business
Activity
% Higher % Same % Lower Index
January 2005 29 53 18 59.2
December 2004 36 50 14 63.9
November 2004 34 57 9 61.9
October 2004 34 51 15 61.5

New Orders

ISM's Non-Manufacturing New Orders Index decreased to 60.5 percent in January from 61.3 percent in December. This indicates continued expansion of new orders but at a slightly slower rate of growth than in December. Comments from members include: "Telecom continues to suffer line losses"; "Better local economy"; "More orders received"; and "Increased capital investment for new fiscal year."

Industries reporting the highest rates of growth of new orders in January are: Transportation; Communication; Mining; Insurance; Entertainment; and Health Services. Industries reporting contraction of new orders in January are: Agriculture and Wholesale Trade.

New Orders % Higher % Same % Lower Index
January 2005 31 55 14 60.5
December 2004 36 46 18 61.3
November 2004 32 57 11 60.4
October 2004 33 53 14 61.9

Employment

Employment activity in the non-manufacturing sector increased in January compared to December but at a slower rate. This was the 16th consecutive monthly increase in non-manufacturing employment. ISM's Non-Manufacturing Employment Index for January is 52.2 percent, a drop of 2.8 percentage points from December's 55 percent. Eight industries reported increased employment, six reported decreases, and two indicated employment was unchanged from December. Comments from respondents include: "Ramping up for new contracts"; "Higher staff levels to accommodate new 1/1/05 accounts"; "New hiring continuing"; "Hired two new sales people to take advantage of increased business and prospects"; and "Hiring freeze removed."

The industries reporting the highest rates of growth in employment in January are: Mining; Transportation; Finance & Banking; Public Administration; Utilities; and Health Services. The industries reporting the highest rates of reduction in employment in January are: Agriculture; Entertainment; Communication; Wholesale Trade; and Other Services*.

Employment % Higher % Same % Lower Index
January 2005 15 71 14 52.2
December 2004 19 70 11 55.0
November 2004 18 74 8 54.9
October 2004 17 75 8 55.4

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 41st consecutive month in January. The index registered 52.5 percent, 3 percentage points lower than December's 55.5 percent. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in January include: "Slower rail delivery"; "Weather-related delays"; "Trucks still scarce, bad weather delays"; and "Congestion at harbor (port) and rail yards."

The industries reporting slowing in supplier deliveries in January are: Agriculture; Wholesale Trade; Retail Trade; Finance & Banking; and Public Administration. No industries are reporting faster supplier deliveries in January.

Supplier
Deliveries
% Slower % Same % Faster Index
January 2005 9 87 4 52.5
December 2004 15 81 4 55.5
November 2004 13 84 3 55.0
October 2004 13 86 1 56.0

Inventories

ISM's Non-Manufacturing Inventories Index registered 49.5 percent in January, 6.5 percentage points lower than the 56 percent reported in December. This reading indicates decreased inventories in January after two months of increased inventories. Of the total respondents in January, 29 percent indicate they do not have inventories or do not measure them. Comments from members include: "Trying to purchase just-in-time instead of keeping inventories"; "Working down oversupply"; "End-of-year selloff and write-downs"; and "Slower business activity."

The industries reporting the highest rates of inventory increases in January are: Agriculture; Transportation; Mining; Construction; and Business Services. The industries reporting the highest rates of inventory decreases in January are: Entertainment; Real Estate; Finance & Banking; Public Administration; and Retail Trade.

Inventory
Change
% Higher % Same % Lower Index
January 2005 22 55 23 49.5
December 2004 32 48 20 56.0
November 2004 24 57 19 52.5
October 2004 22 56 22 50.0

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased in January for the 20th consecutive month and at a slower rate of increase than in December. ISM's Non-Manufacturing Prices Index for January dropped to 66.6 percent, down 7 percentage points from the seasonally adjusted 73.6 percent registered for December. In January, the percentage of members reporting higher prices dipped to 37 percent, one point lower than December's 38 percent, the proportion indicating no change rose 2 percentage points to 59 percent, and the number who noted lower prices decreased 1 percentage point to 4 percent.

The industries reporting the highest rates of increase in prices paid in January are: Mining; Wholesale Trade; Agriculture; Construction; and Insurance. No industries are reporting price decreases in January.

Prices % Higher % Same % Lower Index
January 2005 37 59 4 66.6
December 2004 38 57 5 73.6
November 2004 38 58 4 73.2
October 2004 44 53 3 74.0

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 48 percent in January. This is a decrease of 8.5 percentage points from the 56.5 percent reported for December. January's drop in order backlogs is the first decrease after 20 consecutive months of increased order backlogs. Of the total respondents in January, 40 percent indicated they do not measure backlog of orders. Purchasing and supply executives' comments on backlogs of orders include: "OEMs had been behind schedule"; "Major project completed"; "Cleared out a lot of backorders for end of year"; and "Vendors keeping our supplies in stock."

The industries reporting increases in order backlogs in January are: Mining; Utilities; and Public Administration. The industries reporting decreases in backlogs of orders in January are: Wholesale Trade; Health Services; Business Services; Other Services*; and Retail Trade.

Backlog
of Orders
% Higher % Same % Lower Index
January 2005 12 72 16 48.0
December 2004 21 71 8 56.5
November 2004 18 72 10 54.0
October 2004 17 71 12 52.5

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 18th consecutive month in January. The New Export Orders Index for January is 52.5 percent compared to December's 55.5 percent, indicating a slower rate of growth in January compared to December. Of the total respondents in January, 79 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 January are: Transportation; Other Services*; Retail Trade; and Business Services. The industries reporting decreases in new export orders in January are: Public Administration and Wholesale Trade.

New Export
Orders
% Higher % Same % Lower Index
January 2005 18 69 13 52.5
December 2004 18 75 7 55.5
November 2004 17 73 10 53.5
October 2004 24 62 14 55.0

Imports

In January, the ISM Imports Index registered 53 percent, 8 percentage points lower than the 61 percent reported in December. This indicates that use of imported materials by non-manufacturing industries increased at a slower rate in January than in December. January's index marks the 21st consecutive month of import growth. In January, 65 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 January are: Utilities; Business Services; Wholesale Trade; and Retail Trade. The industries reporting decreases in the use of imports in January are: Public Administration and Other Services*.

Imports % Higher % Same % Lower Index
January 2005 17 72 11 53.0
December 2004 29 64 7 61.0
November 2004 29 66 5 62.0
October 2004 24 67 9 57.5

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in January registered 64.5 percent, a 0.5 percentage point increase from the 64 percent reported in December. This indicates that non-manufacturing purchasing and supply executives feel slightly greater discomfort with current high levels of inventory in January than they did during December. In January, 35 percent of respondents felt their inventories were too high, 6 percent indicated their inventories were too low, and 59 percent said that its inventories were about right.

The industries reporting the highest rates of feeling that their inventories are too high in January are: Construction; Wholesale Trade; Agriculture; Communication; and Health Services. The one industry reporting that its inventories are too low in January is Mining.

Inventory
Sentiment
% Too High % About Right % Too Low Index
January 2005 35 59 6 64.5
December 2004 36 56 8 64.0
November 2004 29 65 6 61.5
October 2004 26 69 5 60.5

*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

Dry Wall; and Steel — 12th month.

Commodities Reported Up in Price

Airfares — 6th month; Aluminum — 13th month; Beef — 2nd month; Building Materials; Carpet; Cheese — 2nd month; Chemicals — 3rd month; Chicken; Class 8 Trailers and Trucks; Copper — 17th month; #2 Diesel Fuel*; Energy; Food; Fuel* — 14th month; Fuel Surcharges; Gasoline* — 14th month; Hardware; Hotel Prices — 2nd month; Natural Gas — 5th month; Paper/Paper Products — 12th month; Pine, Spruce and Treated Lumber; Plastic Bags — 2nd month; Plastic Containers; Plastic Items; Plastic Resin — 2nd month; Plastics — 13th month; Plywood; Pork/Pork Trimmings — 2nd month; PVC; Raw Materials; Roofing Shingles — 3rd month; Stainless Steel; Steel — 15th month; Steel Products — 11th month; and Transportation/Freight Charges — 9th month.

Commodities Reported Down in Price

Butter; Computer Hardware — 4th month; Diesel* — 2nd month; Fuel* — 3rd month; Gasoline* — 2nd month; Soy Oil — 2nd month; Tomatoes — 2nd month; and Unleaded Gasoline — 2nd month.

*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, 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 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 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.

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 February 2005 data will be released at 10:00 a.m. (ET) on March 3, 2005.



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