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December 2004 Manufacturing ISM Report On Business®

FOR RELEASE: January 3, 2005

Contact: Terri Tracey
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3071
  e-mail: ttracey@ism.ws
PMI at 58.6%

DO NOT CONFUSE THIS NATIONAL REPORT with the various regional purchasing reports released across the country. The national 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 2004.

New Orders, Production Grow
Employment, Inventories Grow
Supplier Deliveries Slower

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in December for the 19th consecutive month, while the overall economy grew for the 38th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation. "December's PMI, driven by a significant increase in the New Orders Index, is very encouraging as growth has accelerated for the second consecutive month. This completes a strong year for manufacturing based on the ISM data, as the overall index averaged above 60 percent for 2004. While there is continuing upward pressure on prices, the rate of increase is slowing and definitely trending in the right direction."

Comments from respondents this month focused on inflation, margins and seasonal issues. While many manufacturers are enjoying strong sales, there is concern that inflation is taking its toll on margins, thus reducing profits. While energy and basic commodities are the drivers behind the higher prices, the responses this month show signs of a peak in some commodities.

ISM's PMI registered 58.6 percent in December, an increase of 0.8 percentage point when compared to 57.8 percent in November. ISM's New Orders Index rose 5.9 percentage points from 61.5 percent in November to 67.4 percent in December. ISM's Production Index decreased 0.1 percentage point from 57 percent in November to 56.9 percent in December. The ISM Employment Index is at 52.7 percent for December, a decrease of 4.9 percentage points when compared to the 57.6 percent reported in November.

ISM's Supplier Deliveries Index registered 54.9 percent, 1.6 percentage points lower than November's 56.5 percent. ISM's Inventories Index registered 53.4 percent in December, up from 50.7 percent reported in November. ISM's Customers' Inventories Index for December is at 44 percent, up from 43.5 in November. ISM's Prices Index in December is 72 percent, 2 percentage points lower than the 74 percent reported in November.

ISM's Backlog of Orders Index for December rose 6.5 percentage points to 54 percent from 47.5 percent registered in November. ISM's New Export Orders Index registered 60 percent, an increase of 5.3 percentage points from November's 54.7 percent. ISM's Imports Index increased 2.7 percentage points to 61.1 percent in December, up from 58.4 percent in November.

"December continued a trend of strong growth in the manufacturing sector as 2004 closes with significant momentum going into the first quarter of 2005. The sector struggles with inflationary pressures, but strong demand is a consolation. Manufacturing inventories have grown in five of the last seven months; however, those respondents increasing their inventories indicate that current and expected demand requires higher inventory levels," said Ore.

In December, 14 industries reported growth: Leather; Industrial & Commercial Equipment & Computers; Furniture; Food; Instruments & Photographic Equipment; Transportation & Equipment; Primary Metals; Miscellaneous*; Chemicals; Rubber & Plastic Products; Electronic Components & Equipment; Apparel; Textiles; and Printing & Publishing.

"Alloy Steel; Aluminum; Aluminum Products; Butadiene; Caustic Soda; Chemicals; Copper; Corrugated Containers; Dairy; Diesel Fuel; Energy; Freight; High Density Polyethylene; Low Density Polyethylene; Natural Gas (also reported down in price); Packaging; Paper; PET; Plastic Molding Resins; Plastic Products; Plastics; Polyethylene; Polypropylene; Propylene; Pulp; Resins; Rubber-Based Products; Stainless Steel; Stainless Steel Products (various forms); Steel (also reported down in price); Steel Products (various forms); and Vinyls are the commodities reported up in price. The commodities reported down in price are Fuel (also reported up in price); Gasoline; Natural Gas (also reported up in price) and Steel (also reported up in price). The commodities listed in short supply are Caustic Soda; Resins; Stainless Steel; and Steel," Ore stated.

DECEMBER 2004 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
Dec vs Nov
Rate of Change
Dec vs Nov
PMI 58.6 Growing Faster
New Orders 67.4 Growing Faster
Production 56.9 Growing Slower
Employment 52.7 Growing Slower
Supplier Deliveries 54.9 Slowing Slower
Inventories 53.4 Growing Faster
Customers' Inventories 44.0 Too Low Slower
Prices 72.0 Increasing Slower
Backlog of Orders 54.0 Growing From Contracting
New Export Orders 60.0 Growing Faster
Imports 61.1 Growing Faster

THE ECONOMY AT A GLANCE
Overall Economy Growing Faster
Manufacturing Growing Faster

PMI

The PMI indicates that the manufacturing economy grew in December for the 19th consecutive month. The PMI for December registered 58.6 percent, a 0.8 percentage point increase when compared to the November reading of 57.8 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42.8 percent, over a period of time, generally indicates an expansion of the overall economy. The December PMI indicates that both the overall economy and the manufacturing sector are growing. The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (60.5 percent) corresponds to a 6.5 percent increase in real gross domestic product (GDP). The last time the PMI averaged over 60 percent for one full calendar year was in 1973, when it averaged 65.9 percent. In addition, if the PMI for December (58.6 percent) is annualized, this corresponds to a 5.8 percent increase in GDP.

Month Dec'04 Nov'04 Oct'04 Sep'04 Aug'04
PMI% 58.6 57.8 56.8 58.5 59.0
Month Jul'04 Jun'04 May'04 Apr'04 Mar'04
PMI% 62.0 61.1 62.8 62.4 62.5
Month Feb'04 Jan'04 Dec'03 Nov'03 Oct'03
PMI% 61.4 63.6 63.4 61.3 57.1

New Orders

ISM's New Orders Index grew in December with a reading of 67.4 percent. The index is 5.9 percentage points higher than the 61.5 percent registered in November, and it is the 20th consecutive month the index has exceeded 50 percent. A New Orders Index above 51 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 1987 dollars). Twelve industries reported increases for the month of December: Furniture; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Textiles; Food; Primary Metals; Transportation & Equipment; Printing & Publishing; Chemicals; Electronic Components & Equipment; Paper; and Miscellaneous*.

New Orders %Better %Same %Worse Net Index
December 2004 39 45 16 +23 67.4
November 2004 33 49 18 +15 61.5
October 2004 27 56 17 +10 58.3
September 2004 31 54 15 +16 58.1

Production

ISM's Production Index is 56.9 percent in December, 0.1 percentage point lower than the 57 percent reported in November. December is the 20th consecutive month of growth in the index. An index above 49.9 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in December, 12 registered growth: Leather; Industrial & Commercial Equipment & Computers; Food; Furniture; Instruments & Photographic Equipment; Miscellaneous*; Transportation & Equipment; Wood & Wood Products; Chemicals; Primary Metals; Electronic Components & Equipment; and Textiles.

Production %Better %Same %Worse Net Index
December 2004 30 51 19 +11 56.9
November 2004 28 56 16 +12 57.0
October 2004 29 56 15 +14 58.9
September 2004 33 57 10 +23 61.6

Employment

ISM's Employment Index grew for the 14th consecutive month, following a 37-month trend of contraction. The index registered 52.7 percent in December compared to 57.6 percent in November, a decrease of 4.9 percentage points. An Employment Index above 48 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The eight industries reporting growth in employment during December are: Leather; Apparel; Rubber & Plastic Products; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Food; Miscellaneous*; and Primary Metals.

Employment %Higher %Same %Lower Net Index
December 2004 19 67 14 +5 52.7
November 2004 20 71 9 +11 57.6
October 2004 20 66 14 +6 54.8
September 2004 26 60 14 +12 58.1

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 36th consecutive month in December. ISM's Supplier Deliveries Index for December registered 54.9 percent, a decrease of 1.6 percentage points compared to November's reading of 56.5 percent. A reading above 50 percent indicates slower deliveries. The 11 industries reporting slower supplier deliveries in December are: Apparel; Industrial & Commercial Equipment & Computers; Primary Metals; Food; Glass, Stone & Aggregate; Transportation & Equipment; Instruments & Photographic Equipment; Furniture; Rubber & Plastic Products; Fabricated Metals; and Chemicals.

Supplier
Deliveries
%Slower %Same %Faster Net Index
December 2004 16 76 8 +8 54.9
November 2004 17 77 6 +11 56.5
October 2004 24 70 6 +18 58.6
September 2004 23 73 4 +19 59.6

NOTE: A list of commodities in short supply is available at the end of this report.

Inventories

Manufacturers' inventories grew for the second consecutive month in December as ISM's Inventories Index registered 53.4 percent, an increase of 2.7 percentage points when compared to November's 50.7 percent. An Inventories Index greater than 42.3 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (in constant 1987 dollars). The eight industries reporting higher inventories in December are: Leather; Miscellaneous*; Primary Metals; Transportation & Equipment; Food; Wood & Wood Products; Instruments & Photographic Equipment; and Industrial & Commercial Equipment & Computers.

Inventories %Higher %Same %Lower Net Index
December 2004 24 56 20 +4 53.4
November 2004 18 60 22 -4 50.7
October 2004 17 61 22 -5 48.2
September 2004 20 63 17 +3 51.0

Customers' Inventories**

The December Customers' Inventories Index is at 44 percent, 0.5 percentage point higher compared to 43.5 percent reported in November. Respondents indicate that their customers do not have sufficient inventories on hand (inventories are too low) at this time. This is the 43rd consecutive month that the index has registered below 50 percent. Three industries reported higher customer inventories during December and they are: Textiles; Transportation & Equipment; and Paper.

Customers'
Inventories
%Reporting % Too High % About Right % Too Low Net Index
December 2004 75 10 68 22 -12 44.0
November 2004 74 10 67 23 -13 43.5
October 2004 72 10 67 23 -13 43.5
September 2004 71 8 67 25 -17 41.5

Prices**

ISM's Prices Index indicates manufacturers continue to pay higher prices in December. This is the 34th consecutive month the index has registered higher prices. December's index is at 72 percent, 2 percentage points lower than November's reading of 74 percent. In December, 52 percent of supply executives reported paying higher prices and 8 percent reported paying lower prices, while 40 percent reported that prices were unchanged from the preceding month.

A Prices Index below 46.9 percent, over time, is generally consistent with a decrease in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. Seventeen industries reported paying higher prices in December: Tobacco; Apparel; Leather; Paper; Instruments & Photographic Equipment; Glass, Stone & Aggregate; Miscellaneous*; Industrial & Commercial Equipment & Computers; Chemicals; Furniture; Electronic Components & Equipment; Transportation & Equipment; Textiles; Wood & Wood Products; Food; Printing & Publishing; and Primary Metals.

Prices %Higher %Same %Lower Net Index
December 2004 52 40 8 +44 72.0
November 2004 55 38 7 +48 74.0
October 2004 61 35 4 +57 78.5
September 2004 55 42 3 +52 76.0

NOTE: A list of commodities up in price and down in price is available at the end of this report.

Backlog of Orders**

ISM's Backlog of Orders Index registered 54 percent, indicating manufacturers' backlogs in December increased when compared to November. Of the 86 percent of respondents who report their backlog of orders, 28 percent reported greater backlogs, 20 percent reported smaller backlogs, and 52 percent reported no change from November. The 10 industries reporting an increase in order backlogs during the month are: Furniture; Primary Metals; Miscellaneous*; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Electronic Components & Equipment; Food; Printing & Publishing; and Chemicals.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
December 2004 86 28 52 20 +8 54.0
November 2004 87 18 59 23 -5 47.5
October 2004 87 20 58 22 -2 49.0
September 2004 89 28 54 18 +10 55.0

New Export Orders

ISM's New Export Orders Index for December registered 60 percent, an increase of 5.3 percentage points when compared to November's index of 54.7 percent. This is the 25th consecutive month of growth in export orders. The 12 industries reporting growth in new export orders in December are: Primary Metals; Furniture; Fabricated Metals; Instruments & Photographic Equipment; Food; Miscellaneous*; Chemicals; Industrial & Commercial Equipment & Computers; Paper; Rubber & Plastic Products; Electronic Components & Equipment; and Transportation & Equipment.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
December 2004 75 23 70 7 +16 60.0
November 2004 77 15 79 6 +9 54.7
October 2004 77 15 80 5 +10 56.6
September 2004 78 12 81 7 +5 51.8

Imports

Imports of materials by manufacturers grew during December as the Imports Index registered 61.1 percent. The index increased 2.7 percentage points when compared to November's index of 58.4 percent, indicating a faster rate of growth. The 13 industries reporting growth in import activity for December are: Furniture; Miscellaneous*; Apparel; Glass, Stone & Aggregate; Transportation & Equipment; Food; Industrial & Commercial Equipment & Computers; Fabricated Metals; Printing & Publishing; Wood & Wood Products; Instruments & Photographic Equipment; Rubber & Plastic Products; and Electronic Components & Equipment.

Imports %Reporting %Higher %Same %Lower Net Index
December 2004 79 27 67 6 +21 61.1
November 2004 80 21 74 5 +16 58.4
October 2004 79 21 72 7 +14 58.5
September 2004 79 23 72 5 +18 55.8

*Miscellaneous is a preponderance of jewelry, toys, sporting goods and musical instruments.
**The Backlog of Orders, Prices and Customers' Inventories Indexes do not meet the accepted criteria for seasonal adjustments.

Buying Policy

Average commitment leadtime for Capital Expenditures declined 1 day to 105 days. Average leadtime for Production Materials declined 4 days to 44 days. Average leadtime for Maintenance, Repair and Operating (MRO) supplies declined 3 days to 20 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
December 2004 22 13 15 17 24 9 105
November 2004 24 9 13 19 27 8 106
October 2004 24 11 11 21 25 8 104
September 2004 23 8 15 18 27 9 110
Production Materials              
December 2004 23 39 24 11 2 1 44
November 2004 23 39 24 9 3 2 48
October 2004 21 37 26 11 3 2 50
September 2004 24 39 22 11 2 2 47
MRO Supplies              
December 2004 54 35 9 2 0 0 20
November 2004 53 34 8 4 1 0 23
October 2004 50 37 11 1 1 0 23
September 2004 58 31 10 0 1 0 20

In Short Supply

Caustic Soda — 4th month; Resins; Stainless Steel — 12th month; and Steel — 12th month.

Up in Price

Alloy Steel; Aluminum — 14th month; Aluminum Products — 3rd month; Butadiene; Caustic Soda — 8th month; Chemicals — 11th month; Copper — 3rd month; Corrugated Containers — 11th month; Dairy; Diesel Fuel — 4th month; Energy — 12th month; Freight — 10th month; Fuel* — 2nd month; High Density Polyethylene (HDPE) — 4th month; Low Density Polyethylene (LDPE) — 3rd month; Natural Gas* — 29th month; Packaging — 7th month; Paper — 10th month; PET — 3rd month; Plastic Molding Resins; Plastic Products (various forms) — 11th month; Plastics — 5th month; Polyethylene — 4th month; Polypropylene; Propylene — 3rd month; Pulp; Resins — 5th month; Rubber-Based Products — 2nd month; Stainless Steel — 4th month; Stainless Steel Products (various forms); Steel* — 15th month; Steel Products (various forms) — 5th month; and Vinyls.

Down in Price

Fuel*; Gasoline; Natural Gas* — 2nd month; and Steel* — 2nd month.

*Reported as both up and down in price.

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.

Data and Method of Presentation

The Manufacturing ISM Report On Business® is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. Membership of the Business Survey Committee is diversified by Standard Industrial Classification (SIC) category, based on each industry's contribution to Gross Domestic Product (GDP). Twenty industries from various U.S. geographical areas are represented on the committee. the 20 manufacturing Standard Industry Classification codes are: Food; Tobacco; Textiles; Apparel; Wood & Wood Products; Furniture; Paper; Printing & Publishing; Chemicals; Petroleum; Rubber & Plastic Products; Leather; Glass, Stone & Aggregate; Primary Metals; Fabricated Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Instruments & Photographic Equipment; and Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers' Inventories, Employment, and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher, better, and slower for Supplier Deliveries) and the negative economic direction (lower, worse, and faster for Supplier Deliveries), and the diffusion index. Responses are raw data and are never changed. the diffusion index includes the percent of positive responses plus one-half of those responding the same (considered positive).

The resulting single index number is then seasonally adjusted to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-moveable holidays. All seasonal adjustment factors are supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them. The PMI is a composite index based on the seasonally adjusted diffusion indices for five of the indicators with varying weights: New Orders – 30%; Production – 25%; Employment – 20%; Supplier Deliveries – 15%; and Inventories – 10%.

Diffusion indices have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent that it is generally declining. A PMI over 42.8 percent, over a period of time, indicates that the overall economy, or Gross Domestic Product (GDP), is generally expanding; below 42.8 percent, it is generally declining. The distance from 50 percent or 42.8 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, ISM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

Responses to Buying Policy reflect the percent reporting the current month's leadtime, the approximate weighted number of days ahead for which commitments are made for Production Materials, Capital Expenditures, and Maintenance, Repair, and Operating (MRO) Supplies, expressed as hand-to-mouth (five days), 30 days, 60 days, 90 days, six months (180 days), a year or more (360 days), and the weighted average number of days. these responses are raw data, never revised, and not seasonally adjusted since there is no significant seasonal pattern.

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 Manufacturing ISM Report On Business® is published monthly by the Institute for Supply Management™. 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 report has been issued by the association since 1931, except for a four-year interruption during World War II.

The full text version of the Manufacturing ISM Report On Business® is posted on ISM's Web site at www.ism.ws on the first business day of every month after 10:10 a.m. ET).

The next Manufacturing ISM Report On Business® featuring the January 2004 data will be released at 10:00 a.m. (ET) on February 1, 2005.



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