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February 2002 Non-Manufacturing ISM Report On Business®

FOR RELEASE: March 5, 2002

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (480) 752-6276, ext. 3015
Business Activity at 58.7%

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 February 2002.

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

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in February 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 February, ISM's Non-Manufacturing Business Activity Index increased strongly after indicating a slight contraction in activity in January," Kauffman said. He also added, "This month's Index at 58.7 percent is the strongest business activity index since 59.5 percent was recorded in November 2000. Looking back over the last four months indicates that non-manufacturing business activity continued a see-saw pattern in February, with November and January registering declines and December and February indicating growth. However, February's Index is a large increase over the November-January range and may represent a breakout of the non-manufacturing economy into continued growth in the coming months. Supporting that scenario is a jump in the February New Orders index into territory also not seen since November 2000, and a slower rate of decrease in the February Backlog of Orders Index."

Also this month, Inventories increased for the first time in 16 months, New Export Orders and Imports continued to increase although at slower rates of growth, Employment shrank for the 12th consecutive month, and Prices were unchanged. The Inventory Sentiment Index, after declining for the past three months, moved up to its December 2001 level of 66.5 percent, indicating greater discomfort with current inventory levels. Supplier Deliveries indicated slower performance for the sixth month, with some members' comments indicating that suppliers currently have smaller inventories.

"ISM's Non-Manufacturing Business Activity Index registered 58.7 percent in February, 9.1 percentage points higher than in January, the first strong growth indicated by the Index since December 2000 (56.9 percent). Reports from purchasing and supply executives indicate 12 industry groups grew in February and five groups contracted. Increased business activity in February was reported by 31 percent of members, compared to January's 21 percent. Reduced activity was reported by 16 percent of members compared to 31 percent in January. In February the remaining 53 percent of members indicated no change in business activity compared to 48 percent in January," said Kauffman.

"Overall in February, non-manufacturing industries reported the strongest rate of growth in business activity and new orders in 15 months. In addition, growth was indicated for exports, imports, and inventories. Employment, which usually lags changes in economic direction, decreased and prices were unchanged," Kauffman commented.

Significant reports of commodities in short supply, or up or down in price in February did not include any items in short supply. Price increases were reported for beef and other meats; gasoline; lumber; pipe fittings; steel products; and sugar. Price reductions were reported for coffee; copper and some copper products (other copper products were reported up in price); corrugated; fuel (equal reports of up in price); furniture; paper and paper products; plastic and plastic products; printing; and PVC and PVC products.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index February
Index %
January
Index %
Index Change
from February
Direction &
Rate of Change
February
Index %
January
Index %
Index Change
from February
Business Activity / Production 58.7 49.6 +9.1 Increasing from Decreasing 61.2 52.0 +9.2
New Orders 57.3 49.4 +7.9 Increasing from Decreasing 62.8 55.3 +7.5
Employment 43.6 44.5 -0.9 Decreasing Faster 43.8 42.6 +1.2
Supplier
Deliveries
53.0 53.0 0.0 Unchanged 52.3 51.7 +0.6
Inventories 51.5 47.5 +4.0 Increasing from Decreasing 39.5 40.5 -1.0
Prices 50.0 49.0 +1.0 Unchanged from Decreasing 41.5 43.9 -2.4
Backlog
of Orders
47.5 45.5 +2.0 Decreasing Slower 53.0 44.5 +8.5
New Export
Orders
52.5 56.5 -4.0 Increasing Slower 51.1 50.8 +0.3
Imports 54.3 55.3 -1.0 Increasing Slower 52.0 52.1 -0.1
Inventory
Sentiment
66.5 64.5 +2.0 Increased Feeling of "too high" N/A    

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

Business Activity

ISM's Non-Manufacturing Business Activity Index in February rose 9.1 percentage points on a seasonally adjusted basis to 58.7 percent from January's 49.6 percent. February's Index was the highest since November 2000 (59.5 percent). In February, 12 sectors reported increased business activity, and five sectors reported decreased activity compared to January. The percent of members reporting increased activity in February was 31 percent, an increase of 10 percentage points from January's 21 percent. Decreased activity was reported by 16 percent of members in February, compared to 31 percent in January. Those reporting no change in activity in February totaled 53 percent, compared to 48 percent in January.

The industries reporting the highest rates of growth of business activity in February were: Legal Services; Mining; Retail Trade; Entertainment; and Wholesale Trade. The industries reporting contraction of business activity in February were: Transportation; Insurance; Communication; Construction; and Agriculture.

Business
Activity
% Higher % Same % Lower Index
February 2002 31 53 16 58.7
January 2002 21 48 31 49.6
December 2001 21 52 27 50.1
November 2001 23 52 25 49.8

New Orders

ISM's Non-Manufacturing New Orders Index increased to 57.3 percent in February from 49.4 percent in January. The February New Orders Index was the highest since November 2000 (57.9 percent). Comments from members included: "Improved sales volume," "Increase in requirements and priorities," "New construction keeping activity requests high," and "Improved business conditions."

The industries reporting the highest rates of growth of new orders in February were: Legal Services; Mining; Retail Trade; Entertainment; and Wholesale Trade. The industries reporting contraction of new orders in February were: Agriculture; Insurance; Construction; and Finance and Banking.

New Orders % Higher % Same % Lower Index
February 2002 30 53 17 57.3
January 2002 20 51 29 49.4
December 2001 21 52 27 51.5
November 2001 20 53 27 47.7

Employment

Employment in the non-manufacturing sector contracted in February for the 12th consecutive month. ISM's Non-Manufacturing Employment Index for February was 43.6 percent compared to 44.5 percent in January. After three months of slower rates of employment decrease, February's index marks a somewhat faster decrease rate. Comments from members included: "Have reduced level of contract workers employed," "15% staff reduction done in December taking effect now," "Lower activity has resulted in layoffs," and "Freeze on hiring new or replacement employees."

There were no industries reporting growth in employment in February. Industries reporting the highest rates of reduction in employment in February were: Entertainment; Finance and Banking; Utilities; Construction; and Agriculture.

Employment % Higher % Same % Lower Index
February 2002 7 69 24 43.6
January 2002 7 72 21 44.5
December 2001 11 65 24 44.4
November 2001 11 67 22 44.3

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the sixth consecutive month in February, registering an index value of 53 percent, the same as in January. Comments from purchasing and supply executives concerning supplier deliveries in February included: "Distributors seem to be carrying a smaller inventory," "Lower (supplier) inventory level at year end," "Leadtimes moving out," and "New security restrictions."

The industries that reported the highest rates of slowness of supplier deliveries in February were: Real Estate; Entertainment; Mining; Wholesale Trade; Health Services; and Communication. The industries reporting faster supplier deliveries in February were Public Administration and *Other Services.

Supplier
Deliveries
% Slower % Same % Faster Index
February 2002 9 88 3 53.0
January 2002 9 88 3 53.0
December 2001 10 87 3 53.5
November 2001 12 81 7 52.5

Inventories

Material inventories maintained by non-manufacturing organizations increased in February for the first time in 16 months (the last inventory increase was in October 2000 at 55 percent). ISM's Non-Manufacturing Inventories Index registered 51.5 percent in February, an increase of 4 percentage points from the 47.5 percent reported in January. Of the total respondents in February, 26 percent indicated they do not have inventories. Comments from members included: "New orders," "Higher (patient) census," "More capital improvements," and "Building up spring inventory and carryover of winter inventory."

The industries reporting inventory increases in February were: Legal Services; Retail Trade; Health Services; Transportation; and Public Administration. Industries reporting the highest rates of inventory decrease in February were: Wholesale Trade; Utilities; Finance and Banking; Business Services; and Construction.

Inventory
Change
% Higher % Same % Lower Index
February 2002 22 59 19 51.5
January 2002 22 51 27 47.5
December 2001 20 57 23 48.5
November 2001 22 55 23 49.5

Prices

Prices paid by non-manufacturing organizations for purchased materials and services were unchanged in February after seven consecutive months of reports of lower prices. ISM's Non-Manufacturing Prices Index for February is 50 percent, an increase of 1 percentage point from January's 49 percent. The percentage of members reporting higher prices increased 4 percentage points to 16 percent in February, the proportion indicating no change dropped 6 percentage points to 68 percent, and the number who noted lower prices increased 2 percentage points to 16 percent.

The industries reporting the highest rates of increase in prices paid in February were: Construction; Health Services; Real Estate; Insurance; and Public Administration. The industries that reported the highest rates of price decrease in February were: Communication; Entertainment; Transportation; Business Services; and Finance and Banking.

Prices % Higher % Same % Lower Index
February 2002 16 68 16 50.0
January 2002 12 74 14 49.0
December 2001 4 69 27 38.5
November 2001 6 65 29 38.5

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 47.5 percent in February. This is the 14th consecutive monthly decline in order backlogs. The February index is an increase of 2 percentage points from January's 45.5 percent. Purchasing and supply executives' comments on backlogs of orders included: "Completed old jobs"; "End of year printing and copying is down, mail is higher however"; "Increased orders"; and "Need more staff – in process of hiring." Of the total respondents in February, 35 percent indicated they do not measure backlog of orders.

The industries reporting growth of backlog of orders in February were: Transportation; Utilities; Wholesale Trade; and Public Administration. The industries reporting the highest rates of decline of order backlogs in February were: Business Services; Insurance; Communication; Retail Trade; and Finance and Banking.

Backlog
of Orders
% Higher % Same % Lower Index
February 2002 11 73 16 47.5
January 2002 11 69 20 45.5
December 2001 12 69 19 46.5
November 2001 11 62 27 42.0

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 increased in February for the third consecutive month, but at a slower rate of increase in February than in December or January. The New Export Orders Index for February was 52.5 percent compared to January's 56.5 percent. Of the total respondents in February, 77 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 February were: Communication; Business Services; and Wholesale Trade. The industries reporting decreases in new export orders in February were: Entertainment; Transportation; and *Other Services.

New Export
Orders
% Higher % Same % Lower Index
February 2002 15 75 10 52.5
January 2002 20 73 7 56.5
December 2001 21 68 11 55.0
November 2001 12 73 15 48.5

Imports

Use of imported materials by non-manufacturing industries increased in February, but at a slower rate of increase than in December or January. ISM's Non-Manufacturing Imports Index for February was 54.3 percent, a decrease of 1 percentage point from the 55.3 percent reported in January. In February, 73 percent of respondents reported that they do not use or do not track use of imported materials.

The industries reporting an increase in use of imports in February were: *Other Services; Transportation; and Wholesale Trade. Industries reporting decreased use of imports in February were Communication and Retail Trade.

Imports % Higher % Same % Lower Index
February 2002 12 79 9 54.3
January 2002 11 79 10 55.3
December 2001 17 74 9 55.9
November 2001 13 75 12 51.6

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in February registered 66.5 percent compared to 64.5 percent for January. This increase in the index level indicates that non-manufacturing purchasing and supply executives felt a greater degree of discomfort with current levels of inventory in February than they did during January. February's higher Index marks a change in direction after three months of decline in this index. In February, 36 percent of members felt their inventories were too high (same percentage as in January). Also in February, 3 percent indicated their inventories were too low (7 percent in January), and 61 percent said that their inventories were about right (57 percent in January).

The industries that reported the highest rates of feeling that their inventories were "too high" in February were: Legal Services; Communication; Business Services; Mining; Insurance; and Wholesale Trade. No industry reported its inventories were too low.

Inventory
Sentiment
% Too High % About Right % Too Low Index
February 2002 36 61 3 66.5
January 2002 36 57 7 64.5
December 2001 37 59 4 66.5
November 2001 38 58 4 67.0

*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

None

Commodities Reported Up in Price

Beef; Gasoline; Lumber; Meats and Meat Products; Pipe Fittings; Steel Products; Sugar.

Commodities Reported Down in Price

Coffee; Copper and Copper Products (equal reports of price increases for other copper products); Corrugated; Fuel — 5th month (equal reports of price increases); Furniture; Paper; Paper Products; Plastic and Plastic Products; Printing; PVC and PVC Products.

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 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. In May 2001 the membership of NAPM voted to change the association's name from the National Association of Purchasing Management to the Institute for Supply Management™ to reflect the increasing strategic and global significance of supply management. For further information, see the ISM Web site at www.ism.ws.

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 March 2002 data will be released at 10:00 a.m. (ET) on April 3, 2002.



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