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February 2004 Non-Manufacturing ISM Report On Business®

FOR RELEASE: March 3, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
Business Activity at 60.8%

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 2004.

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

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in February 2004, 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 11th consecutive month in February," Kauffman said. He added, "Also in February, New Orders, Order Backlogs, Employment, Prices, Imports, and Exports increased."

Purchasing and supply executives report that business activity continued to increase in February in the non-manufacturing sector, but at a slower rate of increase than in January. The Business Activity Index for February is 60.8 percent. February's index thus indicates continued growth across non-manufacturing industries. In the non-manufacturing sector, 12 industry groups grew in February, while three contracted and two reported no change from January. Increased business activity in February was reported by 35 percent of members, compared to 40 percent in January. Reduced activity was reported by 13 percent of members, compared to 20 percent in January. In February, the remaining 52 percent of members indicated no change in business activity, compared to 40 percent that reported no change in January.

The Backlog of Orders Index decreased by 0.5 percentage point to 53 percent, indicating growth in order backlogs for the 10th consecutive month but at a slightly slower rate of increase than in January. The February New Orders Index decreased from 64.9 percent in January to 60.3 percent in February. This reflects a slower rate of increase of new orders in February compared to January. Members reported that the prices they pay increased in February for the 23rd consecutive month, but the rate of increase was slower than in January. February's Prices Index is 57.3 percent, a drop of 2.4 percentage points from the 59.7 percent reported in January. This month, 15 industry groups reported paying higher prices compared to January, one reported paying the same, and one reported paying lower prices. Many of members' comments concerning business in February continue to indicate optimism concerning economic activity. Specific comments include: "Things are getting better, faster"; "Economy warming up, but very slowly"; "Continue strong same-store sales growth"; "More business meetings"; and "Fewer controls on spending."

In addition, Inventories decreased for the second consecutive month after two months of increases. With regard to Inventory Sentiment for February, members reported a lower level of concern than in January that inventories are too high. New Export Orders increased for the seventh consecutive month, Imports increased for the 10th consecutive month, and Employment increased for the fifth consecutive month. Supplier Deliveries indicated slower performance for the 30th consecutive month.

Significant reports of commodities in short supply or up or down in price in February indicate that steel and steel pipe are in short supply. Price increases are reported for air freight; alloy products; aluminum and aluminum products; bearings; beef; building materials; carbon steel products; chemicals; conduit and fittings; copper; copper products including tubing and wire; corrugated; #2 diesel fuel; freight charges; freight fuel surcharges; fuel; galvanized coil; gasoline; #2 heating oil; HDPE; medical/surgical supplies; metals; natural gas; oil; oil products; paper; PC memory; plastic; plastic resins; plumbing supplies; poly bags; pork; poultry; PVC; PVC pipe; soy oil; stainless plate; stainless steel products; steel; steel tube; steel pipe; unleaded gasoline; and valves. Cheese; computer equipment; pacemakers; and telecommunications services are reported down in price.

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 January
Direction &
Rate of Change
February
Index %
January
Index %
Index Change
from January
Business Activity / Production 60.8 65.7 -4.9 Increasing slower 63.9 71.1 -7.2
New Orders 60.3 64.9 -4.6 Increasing slower 66.4 71.1 -4.7
Employment 52.7 53.4 -0.7 Increasing slower 56.3 52.9 +3.4
Supplier Deliveries 55.5 56.5 -1.0 Slowing slower 62.1 60.4 +1.7
Inventories 49.0 49.5 -0.5 Decreasing faster 49.4 48.9 +0.5
Prices 57.3 59.7 -2.4 Increasing slower 81.5 75.5 +6.0
Backlog of Orders 53.0 53.5 -0.5 Increasing slower 62.0 60.5 +1.5
New Export Orders 55.5 51.0 +4.5 Increasing faster 54.9 57.5 -2.6
Imports 58.5 54.5 +4.0 Increasing faster 60.2 59.5 +0.7
Inventory Sentiment 58.0 59.0 -1.0 Lesser feeling of "too high" N/A N/A N/A
Customers' Inventories N/A N/A N/A   38.5 40.0 -1.5

* 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 February eased to 60.8 percent from January's seasonally-adjusted record high of 65.7 percent, indicating a slower rate of growth of activity in February. February's index continues the period of growth in non-manufacturing business activity reflected over the past 11 months. With the exception of March 2003, growth in business activity has been reported by ISM members every month beginning with February 2002. This month 12 sectors reported increased business activity, three sectors reported decreased activity, and two reported unchanged activity compared to January.

The industries reporting the highest rates of growth of business activity in February are: Mining; Transportation; Insurance; Retail Trade; and Communication. The industries reporting contraction of business activity in February are: Construction; Entertainment; and Finance & Banking.

Business
Activity
% Higher % Same % Lower Index
February 2004 35 52 13 60.8
January 2004 40 40 20 65.7
December 2003 36 40 24 58.0
November 2003 34 54 12 59.6

New Orders

ISM's Non-Manufacturing New Orders Index dropped to 60.3 percent in February from 64.9 percent in January. This indicates continued expansion of new orders but at a slower rate of growth than in January. Comments from members include: "Increase in number of maintenance contracts being issued"; "Increasing number of international customers"; "Warm weather and stronger demand for construction tools"; and "Higher resident occupancy in nursing homes."

The industries reporting the highest rates of growth of new orders in February are: Mining; Transportation; Insurance; Wholesale Trade; Retail Trade; and Health Services. The industries reporting contraction of new orders in February are: Construction; Entertainment; and Finance & Banking.

New Orders % Higher % Same % Lower Index
February 2004 34 54 12 60.3
January 2004 40 43 17 64.9
December 2003 36 44 20 59.5
November 2003 33 57 10 60.8

Employment

Employment in the non-manufacturing sector in February expanded for the fifth consecutive month after decreasing slightly in September 2003. ISM's Non-Manufacturing Employment Index for February is 52.7 percent compared to 53.4 percent in January. February's Employment Index indicates that non-manufacturing employment expanded at a slightly slower rate in February than in January. Comments from respondents include: "Continuing rightsizing of company"; "New positions and filling backlog of existing positions"; "Hiring freeze is still in effect, but key/needed positions are being advertised"; "Increased business"; and "Decreasing use of temp help and more hires to avoid premiums."

The industries reporting the highest rates of growth in employment in February are: Transportation; Communication; Finance & Banking; Retail Trade; and Health Services. Industries reporting the highest rates of reduction in employment in February are: Construction; Agriculture; Insurance; Business Services; and Public Administration.

Employment % Higher % Same % Lower Index
February 2004 16 70 14 52.7
January 2004 18 68 14 53.4
December 2003 19 68 13 54.0
November 2003 20 69 11 54.4

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 30th consecutive month in February. The index registered 55.5 percent, 1 percentage point lower than in January. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in February include: "Huge material increases, shortage of material"; "Lower service levels, frequent stockouts"; "Supply tighter"; and "Shortages in raw materials."

The industries reporting the highest rates of slowing in supplier deliveries in February are: Mining; Entertainment; Wholesale Trade; Utilities; and Insurance. The industries reporting faster supplier deliveries in February are Transportation; Health Services; and Business Services.

Supplier
Deliveries
% Slower % Same % Faster Index
February 2004 15 81 4 55.5
January 2004 17 79 4 56.5
December 2003 10 84 6 52.0
November 2003 9 88 3 53.0

Inventories

ISM's Non-Manufacturing Inventories Index registered 49 percent in February, 0.5 percentage point lower than the 49.5 percent reported in January. February's index reflects the second consecutive decrease (index value less than 50) in material inventories maintained by non-manufacturing organizations after two consecutive monthly increases. Of the total respondents in February, 31 percent indicate they do not have inventories or do not measure them. Comments from members include: "Lowering inventory costs"; "Expected reduction in excess materials bought at the end of 2003"; "Transportation disruptions from winter weather"; and "Better inventory controls in place."

The industries reporting the highest rates of inventory increases in February are: Entertainment; Insurance; Business Services; Communication; and Health Services. The industries reporting the highest rates of inventory decreases in February are: Agriculture; Mining; Finance & Banking; Utilities; Public Administration; and Retail Trade.

Inventory
Change
% Higher % Same % Lower Index
February 2004 18 62 20 49.0
January 2004 20 59 21 49.5
December 2003 22 59 19 51.5
November 2003 22 58 20 51.0

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased in February for the 23rd consecutive month (based on seasonal adjustments released in January 2004) but at a slower rate of increase than in January. ISM's Non-Manufacturing Prices Index for February is 57.3 percent, a decrease of 2.4 percentage points from the 59.7 percent registered for January. In February, the percentage of members reporting higher prices increased 5 percentage points to 31 percent from 26 percent in January, the proportion indicating no change dropped 10 percentage points to 60 percent, and the number who noted lower prices increased 5 percentage points to 9 percent.

The industries reporting the highest rates of increase in prices paid in February are: Wholesale Trade; Agriculture; Construction; Mining; and Real Estate. The only industry reporting price decreases in February is Business Services.

Prices % Higher % Same % Lower Index
February 2004 31 60 9 57.3
January 2004 26 70 4 59.7
December 2003 19 74 7 60.3
November 2003 18 73 9 58.1

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 53 percent in February. This is a decrease of 0.5 percentage point from January's 53.5 percent and represents the 10th consecutive month of growth in order backlogs. Of the total respondents in February, 42 percent indicated they do not measure backlog of orders. Purchasing and supply executives' comments on backlogs of orders include: "Product manufacturers' production stoppages"; "Increase in sales creating some backlogs"; "Less labor to process orders"; and "Backlogs are increasing due to bad weather."

The industries reporting the highest rates of growth in backlog of orders in February are: Mining; Communication; Utilities; Transportation; and Wholesale Trade. The industries reporting a decline of order backlogs in February are: Entertainment; Business Services; Public Administration; Health Services; and Other Services*.

Backlog
of Orders
% Higher % Same % Lower Index
February 2004 17 72 11 53.0
January 2004 19 69 12 53.5
December 2003 22 67 11 55.5
November 2003 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 seventh consecutive month in February. The New Export Orders Index for February is 55.5 percent compared to January's 51 percent, indicating a faster rate of growth in February compared to January. Of the total respondents in February, 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 February are: Wholesale Trade; Retail Trade; Communication; and Other Services*. The industries reporting decreases in new export orders in February are: Construction and Business Services.

New Export
Orders
% Higher % Same % Lower Index
February 2004 23 65 12 55.5
January 2004 16 70 14 51.0
December 2003 24 67 9 57.5
November 2003 25 59 16 54.5

Imports

In February, the ISM Imports Index registered 58.5 percent, up from 54.5 percent in January. This indicates that use of imported materials by non-manufacturing industries increased at a faster rate in February than in January. February's index marks the 10th consecutive month of import growth after the April 2003 index value of 50 percent indicated no change in imports compared to March. In February, 67 percent of respondents reported that they do not use or do not track use of imported materials.

The industries reporting increases in the use of imports in February are: Communication; Construction; Retail Trade; Wholesale Trade; Business Services; and Health Services. The industries reporting decreased use of imports in February are: Finance & Banking and Other Services*.

Imports % Higher % Same % Lower Index
February 2004 25 67 8 58.5
January 2004 23 63 14 54.5
December 2003 22 70 8 57.0
November 2003 23 69 8 57.5

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in February registered 58 percent, a decrease from 59 percent reported in January. This is the lowest Inventory Sentiment Index since October 1999, when it was also 58 percent. This indicates that non-manufacturing purchasing and supply executives feel less discomfort with current levels of inventory in February than they did during January. In February, 26 percent of respondents felt their inventories were too high, 10 percent indicated their inventories were too low, and 64 percent said that their inventories were about right.

The industries reporting the highest rates of feeling that their inventories are too high in February are: Business Services; Wholesale Trade; Communication; Finance & Banking; and Other Services*. The only industry reporting that its inventories are too low in February is Public Administration.

Inventory
Sentiment
% Too High % About Right % Too Low Index
February 2004 26 64 10 58.0
January 2004 27 64 9 59.0
December 2003 31 62 7 62.0
November 2003 30 64 6 62.0

*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

Steel; Steel Pipe.

Commodities Reported Up in Price

Air Freight; Alloy Products; Aluminum/Aluminum Products — 2nd month; Bearings — 2nd month; Beef* — 14th month; Building Materials; Carbon Steel Products; Chemicals — 2nd month; Conduit and Fittings; Copper — 6th month; Copper Products including Tubing and Wire; Corrugated; #2 Diesel Fuel — 3rd month; Freight Charges — 2nd month; Freight Fuel Surcharges; Fuel — 3rd month; Galvanized Coil; Gasoline — 3rd month; #2 Heating Oil — 2nd month; HDPE; Medical/Surgical Supplies — 3rd month; Metals; Natural Gas — 3rd month; Oil; Oil Products; Paper; PC Memory; Plastic — 2nd month; Plastic Resins; Plumbing Supplies; Poly Bags; Pork — 4th month; Poultry; PVC; PVC Pipe — 3rd month; Soy Oil — 5th month; Stainless Plate; Stainless Steel Products; Steel — 4th month; Steel Tube; Steel Pipe — 2nd month; Unleaded Gasoline — 2nd month; Valves.

Commodities Reported Down in Price

Cheese; Computer Equipment — 2nd month; Pacemakers; Telecommunications Services.

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 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 March 2004 data will be released at 10:00 a.m. (ET) on April 5, 2004.



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