August 2004 Non-Manufacturing ISM Report On Business®

FOR RELEASE: September 3, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
Business Activity at 58.2%

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 August 2004.

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

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in August 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 17th consecutive month in August," Kauffman said. He added, "Also in August, New Orders, Employment, Order Backlogs, Imports, Prices, Exports and Inventories increased."

Purchasing and supply executives report that business activity continued to increase in August in the non-manufacturing sector, but the rate of increase was slower than in July. The Business Activity Index for August is 58.2 percent, down 6.6 percentage points from July's 64.8 percent. August's index indicates continued growth across most non-manufacturing industries. In August, 10 industry groups reported growth, six indicated contraction, and one reported business unchanged from July. Increased business activity in August was reported by 32 percent of members, compared to 38 percent in July. Reduced activity was reported by 18 percent of members, compared to 10 percent in July. In August, the remaining 50 percent of members indicated no change in business activity, compared to 52 percent that reported no change in July.

The Backlog of Orders Index decreased by 2 percentage points to 53 percent, indicating growth in order backlogs for the 16th consecutive month but at a slower rate of increase than in July. The August New Orders Index decreased from 66.4 percent in July to 58.6 percent in August. This indicates a slower rate of increase of new orders in August compared to July. Members reported that the prices they pay increased in August for the 29th consecutive month, with a somewhat slower rate of increase than in July. August's Prices Index is 70 percent, a decline of 3.1 percentage points from the 73.1 percent reported in July. This month, 40 percent of all respondents and 14 of 17 non-manufacturing industries reported paying higher prices compared to July. Many of members' comments regarding business in August indicate continued positive business conditions but with concern for slowing growth rates and continued concern about inflationary pressures. Specific comments include: "Overall economic conditions have stabilized, but growing at a slower rate than earlier this year"; "Economy recovering slowly"; "Slow advances are appearing in multiple sectors"; "The rise in the price of fuel is affecting all areas of the organization"; and "Business continues to track better than last year, same time period."

In addition, Inventories increased for the sixth consecutive month. With regard to Inventory Sentiment for August, members reported a lower level of concern than in July that inventories are too high. New Export Orders increased for the 13th consecutive month and Imports increased for the 16th consecutive month. Employment increased after being flat in July. Supplier Deliveries indicated slower performance for the 36th consecutive month.

Significant reports of commodities in short supply or up or down in price in August indicate that cement/concrete; computer accessories; ethanol/ethyl alcohol; steel; steel products; and strapping are in short supply. Price increases are reported for airfares; aluminum; asphalt products; beef (some reports of price decreases); concrete; construction services; construction materials; copper; copper products; corrugated; dairy products (some reports of price decreases); #2 diesel fuel; electricity; electronic parts and products; ethanol/ethyl alcohol; food; fuel (some reports of price decreases); fuel surcharges; gasoline (some reports of price decreases); halibut; #2 heating oil; IPA; lumber; metals; methanol; oil-related products; paper; paper products; petroleum-based products; plastic bags; plastic products; plastics; plywood; polyethylene items (variety); produce; PVC pipe; roofing materials; service contracting; stainless steel pipe and products; steel; steel drums; steel products (large variety); transportation/freight; and wood/wood products. Price decreases are reported for beef (some reports of price increases); cheese; chicken; computer systems and peripherals; dairy products (some reports of price increases); fuel (some reports of price decreases); and gasoline (some reports of price decreases).

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index August
Index %
July
Index %
Index Change
from July
Direction &
Rate of Change
August
Index %
July
Index %
Index Change
from July
Business Activity / Production 58.2 64.8 -6.6 Increasing slower 59.5 66.1 -6.6
New Orders 58.6 66.4 -7.8 Increasing slower 61.2 64.7 -3.5
Employment 52.5 50.0 +2.5 Increasing from unchanged 55.7 57.3 -1.6
Supplier Deliveries 57.0 58.0 -1.0 Slowing slower 63.2 64.2 -1.0
Inventories 53.0 54.0 -1.0 Increasing slower 51.7 49.9 +1.8
Prices 70.0 73.1 -3.1 Increasing slower 81.5 77.0 +4.5
Backlog of Orders 53.0 55.0 -2.0 Increasing slower 55.0 58.0 -3.0
New Export Orders 55.0 55.5 -0.5 Increasing slower 54.2 56.2 -2.0
Imports 63.5 60.5 +3.0 Increasing faster 59.2 59.9 -0.7
Inventory Sentiment 62.5 64.0 -1.5 Lesser feeling of "too high" N/A N/A N/A
Customers' Inventories N/A N/A N/A   45.5 37.5 +8.0

* 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 August dropped to 58.2 percent from July's 64.8 percent, indicating a slower rate of growth of activity in August. This month, 10 sectors reported increased business activity, six reported decreased activity, and one reported unchanged activity compared to July.

The industries reporting the highest rates of growth of business activity in August are: Real Estate; Finance & Banking; Agriculture; Utilities; and Mining. The industries reporting the highest rates of contraction of business activity in August are: Legal Services; Entertainment; Transportation; Construction; and Communication.

Business
Activity
% Higher % Same % Lower Index
August 2004 32 50 18 58.2
July 2004 38 52 10 64.8
June 2004 39 50 11 59.9
May 2004 40 51 9 65.2

New Orders

ISM's Non-Manufacturing New Orders Index decreased to 58.6 percent in August from 66.4 percent in July. This indicates continued expansion of new orders but at a slower rate of growth than in July. Comments from members include: "Expanded call center to accommodate additional business"; "Adjusting down budgets for capital spend due to underperforming retail sales"; "Activity has slowed"; and "Demand-driven product expansion."

Industries reporting the highest rates of growth of new orders in August are: Real Estate; Agriculture; Retail Trade; Utilities; and Business Services. Industries reporting contraction of new orders in August are: Legal Services; Transportation; and Construction.

New Orders % Higher % Same % Lower Index
August 2004 32 52 16 58.6
July 2004 39 51 10 66.4
June 2004 40 52 8 62.4
May 2004 37 52 11 61.3

Employment

Employment activity in the non-manufacturing sector increased in August compared to July, after experiencing no change in July compared to June. July's unchanged report came after nine consecutive months of non-manufacturing employment expansion. ISM's Non-Manufacturing Employment Index for August is 52.5 percent, a rise of 2.5 percentage points from July's 50 percent. Nine industries reported increased employment, seven reported decreases, and one indicated employment was unchanged from July. Comments from respondents include: "Additional business"; "More projects — high demand"; "Retirements and hiring freezes"; "Added corporate staff"; and "Reducing staff because of lower-than-expected sales."

The industries reporting the highest rates of growth in employment in August are: Real Estate; Business Services; Health Services; Finance & Banking; Construction; Wholesale Trade; and Other Services*. The industries reporting the highest rates of reduction in employment in August are: Legal Services; Insurance; Entertainment; Mining; and Public Administration.

Employment % Higher % Same % Lower Index
August 2004 18 69 13 52.5
July 2004 18 68 14 50.0
June 2004 27 64 9 57.4
May 2004 23 68 9 56.3

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 36th consecutive month in August. The index registered 57 percent, 1 percentage point lower than in July. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in August include: "Seems to be less order backlog"; "Manufacturing shops are full of orders and operating at high capacity"; "Shortage of relocation trucks"; and "Leadtimes have increased due to product demand."

The industries reporting the highest rates of slowing in supplier deliveries in August are: Mining; Transportation; Entertainment; Utilities; and Wholesale Trade. No industry reported faster supplier deliveries in August.

Supplier
Deliveries
% Slower % Same % Faster Index
August 2004 16 82 2 57.0
July 2004 20 76 4 58.0
June 2004 17 81 2 57.5
May 2004 15 82 3 56.0

Inventories

ISM's Non-Manufacturing Inventories Index registered 53 percent in August, 1 percentage point lower than the 54 percent reported in July. August's index indicates the sixth consecutive monthly increase in material inventories maintained by non-manufacturing organizations. Of the total respondents in August, 29 percent indicate they do not have inventories or do not measure them. Comments from members include: "Continuing accumulation of inventory"; "Planned inventory reduction"; "Have been slower to replenish, and in smaller quantities"; and "Added inventory to protect costs on committed sales."

The industries reporting the highest rates of inventory increases in August are: Legal Services; Construction; Wholesale Trade; Retail Trade; and Business Services. The industries reporting the highest rates of inventory decreases in August are: Transportation; Agriculture; Entertainment; Finance & Banking; and Communication.

Inventory
Change
% Higher % Same % Lower Index
August 2004 28 50 22 53.0
July 2004 27 54 19 54.0
June 2004 28 59 13 57.5
May 2004 25 58 17 54.0

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased in August for the 29th consecutive month but at a slower rate of increase than in July. ISM's Non-Manufacturing Prices Index for August declined to 70 percent, down 3.1 percentage points from the 73.1 percent registered for July. In August, the percentage of members reporting higher prices decreased 5 percentage points to 40 percent from 45 percent in July, the proportion indicating no change rose 6 percentage points to 56 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 August are: Agriculture; Wholesale Trade; Utilities; Construction; Mining; and Real Estate. The only industry reporting price decreases in August is Legal Services.

Prices % Higher % Same % Lower Index
August 2004 40 56 4 70.0
July 2004 45 50 5 73.1
June 2004 52 45 3 74.6
May 2004 55 42 3 74.4

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 53 percent in August. This is a decrease of 2 percentage points from July's 55 percent and represents the 16th consecutive month of growth in order backlogs. Of the total respondents in August, 40 percent indicated they do not measure backlog of orders. Purchasing and supply executives' comments on backlogs of orders include: "Increased production"; "More bookings"; "Longer leadtime on USB and blue tooth components"; and "Caught up on production."

The industries reporting the highest rates of growth in backlog of orders in August are: Construction; Real Estate; Utilities; Communication; and Finance & Banking. The industries reporting a decline of order backlogs in August are: Mining; Public Administration; and Health Services.

Backlog
of Orders
% Higher % Same % Lower Index
August 2004 18 70 12 53.0
July 2004 23 64 13 55.0
June 2004 18 75 7 55.5
May 2004 21 71 8 56.5

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 13th consecutive month in August. The New Export Orders Index for August is 55 percent compared to July's 55.5 percent, indicating a slightly slower rate of growth in August compared to July. Of the total respondents in August, 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 August are: Construction; Wholesale Trade; Other Services*; and Communication. The industries reporting decreases in new export orders in August are: Transportation and Business Services.

New Export
Orders
% Higher % Same % Lower Index
August 2004 19 72 9 55.0
July 2004 20 71 9 55.5
June 2004 29 61 10 59.5
May 2004 15 74 11 52.0

Imports

In August, the ISM Imports Index registered 63.5 percent, 3 percentage points higher than the 60.5 percent reported in July. This indicates that use of imported materials by non-manufacturing industries increased at a faster rate in August than in July. August's index marks the 16th consecutive month of import growth. In August, 70 percent of respondents reported that they do not use or do not track the use of imported materials.

The industries reporting the highest rates of increase in the use of imports in August are: Construction; Communication; Business Services; Wholesale Trade; and Entertainment. No industry reported decreased use of imports in August.

Imports % Higher % Same % Lower Index
August 2004 29 69 2 63.5
July 2004 24 73 3 60.5
June 2004 22 69 9 56.5
May 2004 27 65 8 59.5

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in August registered 62.5 percent, a 1.5 percentage point decrease from the 64 percent reported in July. This indicates that non-manufacturing purchasing and supply executives feel less discomfort with current levels of inventory in August than they did during July. In August, 34 percent of respondents felt their inventories were too high, 9 percent indicated their inventories were too low, and 57 percent said that their inventories were about right.

The industries reporting the highest rates of feeling that their inventories are too high in August are: Construction; Legal Services; Insurance; Business Services; Communication; and Wholesale Trade. The industries reporting that their inventories are too low in August are: Entertainment and Public Administration.

Inventory
Sentiment
% Too High % About Right % Too Low Index
August 2004 34 57 9 62.5
July 2004 36 56 8 64.0
June 2004 28 65 7 60.5
May 2004 30 60 10 60.0

*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

Cement/Concrete — 4th month; Computer Accessories; Ethanol/Ethyl Alcohol; Steel — 7th month; Steel Products — 6th month; Strapping.

Commodities Reported Up in Price

Airfares; Aluminum — 8th month; Asphalt Products; Beef* — 5th month; Concrete; Construction Materials; Construction Services; Copper — 12th month; Copper Products (various forms); Corrugated — 4th month; Dairy Products* — 5th month; #2 Diesel Fuel — 9th month; Electricity; Electronic Parts and Products; Ethanol/Ethyl Alcohol; Food — 4th month; Fuel* — 9th month; Fuel Surcharges — 2nd month; Gasoline* — 9th month; Halibut; #2 Heating Oil — 2nd month; IPA; Lumber — 2nd month; Metals; Methanol; Oil-Related Products; Paper — 7th month; Paper Products — 6th month; Petroleum-Based Products — 5th month; Plastic Bags; Plastic Products (various forms) — 3rd month; Plastics — 8th month; Plywood; Polyethylene Items (various forms) — 3rd month; Produce; PVC Pipe; Roofing Materials — 3rd month; Service Contracting; Stainless Steel Pipe and Products — 2nd month; Steel — 10th month; Steel Drums; Steel Products (various forms) — 6th month; Transportation/Freight — 4th month; Wood/Wood Products.

Commodities Reported Down in Price

Beef* — 2nd month; Cheese — 3rd month; Chicken; Computer Systems and Peripherals — 4th month; Dairy Products*; Fuel* — 2nd month; Gasoline* — 3rd 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 September 2004 data will be released at 10:00 a.m. (ET) on October 5, 2004.


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