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January 2002 Manufacturing ISM Report On Business®

FOR RELEASE: February 1, 2002

Contact: Kristen Kioa
  NAPM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
PMI at 49.9%

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 January 2002.

New Orders, Production Growing
Supplier Deliveries Slower
Employment, Inventories Decline
Exports, Imports Growing

(Tempe, Arizona) – Economic activity in the manufacturing sector declined for the 18th consecutive month in January while the overall economy grew for the third 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™'s Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation. "While the manufacturing sector experienced a decline in January, it is encouraging that the rate of decline has slowed to its lowest measurable level. In January, new orders, production, and supplier deliveries provided positive indications of a potential return to growth in the manufacturing sector, while employment and inventories continued to constrain the PMI. Eight industries showed improvement in new orders and four of those – leather; wood & wood products; instruments & photographic equipment; and transportation & equipment were quite strong. The manufacturing sector continues to make significant progress toward recovery."

ISM's Backlog of Orders Index indicates that order backlogs declined for the 21st consecutive month. ISM's Supplier Deliveries Index reversed direction and reflects slower deliveries after 10 months of faster deliveries. Manufacturing employment continued to decline in January as the index fell below the breakeven point (an index of 50 percent) for the 16th consecutive month. ISM's Prices Index remained below 50 percent as manufacturers experienced lower prices for the 11th consecutive month. New Export Orders grew in January after four consecutive months of decline. January's Imports Index moved upward and registered growth for the second month. Comments from purchasing and supply executives this month reflect many concerns with regard to continuing softness within their industry. However, there is a sense that orders are beginning to build and that manufactures are starting to plan for increased business in the months ahead.

ISM's PMI is 49.9 percent in January, an increase of 1.8 percentage points from the 48.1 percent reported in December. ISM's New Orders Index declined slightly from 55.5 percent in December to 55.3 percent in January. ISM's Production Index rose 1.7 percentage points from 50.3 percent in December to 52 percent in January. The ISM Employment Index is at 42.6 percent for January, an increase of 3.4 percentage points when compared to the 39.2 percent reported in December.

ISM's Supplier Deliveries Index rose to 51.7 percent from 48 percent in December. ISM's Inventories Index is 40.5 percent. ISM's Customers' Inventories Index declined slightly to 43.5 percent from December's 44 percent indicating a faster rate of inventory liquidation when compared to December. ISM's Prices Index in January is 43.9 percent, an increase of 10.7 percentage points from December's 33.2 percent. ISM's Backlog of Orders Index rose from 39.5 percent in December to 44.5 percent in January.

ISM's New Export Orders Index registered 50.8 percent, up 3.2 percentage points from December's 47.6 percent. Imports of materials by manufacturers grew, as ISM's Imports Index is 52.1 percent for the month, up from December's 50.3 percent.

"The overall picture shows improvement in manufacturing activity during the month of January," added Ore. "While the manufacturing decline is now in its 18th month, some industries are starting to show significant signs of recovery as both new orders and new export orders are improving. Though prices continue to decline, a slower rate of decline indicates that some industries are, or should be shortly, developing pricing power."

Of the 20 industries in the manufacturing sector, three industries reported growth: Leather; Wood & Wood Products; and Transportation & Equipment.

"There were no reports of commodities in short supply or up in price. The commodities reported down in price are: Aluminum, Caustic Soda, Copper, Corrugated Containers, Electricity, Energy, Linerboard, Methanol, Natural Gas, Newsprint, Paper, Plastic, Polyethylene, and Steel," Ore stated.

JANUARY 2002 ISM BUSINESS SURVEY AT A GLANCE
Series Direction
Index
Rate of Change
Jan vs Dec
Jan vs Dec
PMI 49.9 Contracting Slower
New Orders 55.3 Growing Slower
Production 52.0 Growing Faster
Employment 42.6 Contracting Slower
Supplier Deliveries 51.7 Slower From Faster
Inventories 40.5 Contracting Slower
Customers' Inventories 43.5 Too Low Lower
Prices 43.9 Contracting Slower
Backlog of Orders 44.5 Contracting Slower
New Export Orders 50.8 Growing From Contracting
Imports 52.1 Growing Faster

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

PMI

The PMI indicates that the manufacturing economy failed to grow during the month of January with an index of 49.9 percent. However, the overall economy grew for the third consecutive month. While this is the 18th consecutive month of decline in manufacturing, the rate of contraction slowed further when compared to December's 48.1 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 42.7 percent, over a period of time, generally indicates an expansion of the overall economy. The January PMI indicates that the overall economy is growing and the manufacturing sector is contracting. Ore added, "The past relationship between the PMI and the overall economy indicates that the PMI for January (49.9 percent) corresponds to a 2.6 percent annual increase in real gross domestic product (GDP)."

Month Jan'02 Dec'01 Nov'01 Oct'01 Sep'01
PMI% 49.9 48.1 44.7 39.5 46.2
Month Aug'01 Jul'01 Jun'01 May'01 Apr'01
PMI% 47.9 43.9 44.3 42.3 43.2
Month Mar'01 Feb'01 Jan'01 Dec'00 Nov'00
PMI% 43.2 42.0 41.7 44.2 48.1

New Orders

ISM's New Orders Index indicated growth in January for the second consecutive month. The index is 55.3 percent, 0.2 percentage point less than the 55.5 percent registered in December. A New Orders Index above 50.8 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 1987 dollars). Industries reporting increases for the month of January are: Leather; Wood & Wood Products; Instruments & Photographic Equipment; Transportation & Equipment; Food; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; and Fabricated Metals.

New Orders %Better %Same %Worse Net Index
January 2002 26 52 22 +4 55.3
December 2001 24 46 30 -6 55.5
November 2001 24 44 32 -8 48.4
October 2001 18 38 44 -26 38.0

Production

ISM's Production Index is 52 percent in January up from 50.3 percent in December, an increase of 1.7 percentage points. This is the second consecutive month that the Production Index has been above 50 percent indicating growth in manufacturing production. An index above 49.5 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the 20 industries reporting, those registering growth in January are: Leather; Transportation & Equipment; Wood & Wood Products; Primary Metals; Printing & Publishing; and Industrial & Commercial Equipment & Computers.

Production %Better %Same %Worse Net Index
January 2002 22 54 24 -2 52.0
December 2001 21 52 27 -6 50.3
November 2001 20 52 28 -8 48.2
October 2001 17 48 35 -18 40.4

Employment

ISM's Manufacturing Employment Index remained below 50 percent in January for the 16th consecutive month. The Index registered 42.6 percent in January compared to 39.2 percent in December, an increase of 3.4 percentage points.

An Employment Index above 47.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. There were no reports of higher employment in any of the sectors during the month.

Employment %Higher %Same %Lower Net Index
January 2002 7 65 28 -21 42.6
December 2001 3 70 27 -24 39.2
November 2001 5 61 34 -29 35.7
October 2001 8 53 39 -31 34.9

Supplier Deliveries

ISM's Supplier Deliveries Index indicates delivery performance is slower when compared to December (a reading below 50 percent indicates faster deliveries). At 51.7 percent, the index is 3.7 percentage points higher than December's 48 percent. The industries reporting slower supplier deliveries in January were: Textiles; Paper; Furniture; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Rubber & Plastic Products; Fabricated Metals; and Industrial & Commercial Equipment & Computers.

Supplier
Deliveries
%Slower %Same %Faster Net Index
January 2002 6 88 6 0 51.7
December 2001 5 86 9 -4 48.0
November 2001 4 88 8 -4 47.8
October 2001 8 83 9 -1 48.7

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

Inventories

The rate of liquidation of manufacturers' inventories decelerated in January as the Inventories Index registered 40.5 percent, up from the 38.2 percent reported in December. The Inventories Index has been under 50 percent for 24 consecutive months. An Inventories Index greater than 41.3 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (constant 1987 dollars). Food is the only industry reporting higher inventories.

Inventories %Higher %Same %Lower Net Index
January 2002 10 58 32 -22 40.5
December 2001 9 55 36 -27 38.2
November 2001 9 55 36 -27 37.9
October 2001 13 50 37 -24 37.3

Customers' Inventories

Customers' inventories in January were perceived as lower when compared to December. The Customers' Inventories Index is at 43.5 percent, 0.5 percentage point lower than the 44 percent reported in December. The industries reporting excessive customer inventories in January are Primary Metals and Food.

Customers'
Inventories
%Reporting %Too High %About Right %Too Low Net Index
January 2002 88 10 67 23 -13 43.5
December 2001 91 11 66 23 -12 44.0
November 2001 89 12 65 23 -11 44.5
October 2001 86 11 67 22 -11 44.5

Prices

ISM's Prices Index indicates manufacturers continued to pay lower prices in January. With the index at 43.9 percent, this marks the 11th consecutive month the index has been below 50 percent. The index is 10.7 percentage points higher than December's 33.2 percent, indicating a significant slowing in the rate of decline in prices. In January, 7 percent of supply executives reported paying higher prices and 24 percent reported paying lower prices, while 69 percent reported that prices were unchanged from the preceding month.

A Prices Index below 46.6 percent, over time, is generally consistent with a decrease in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. Tobacco; Instruments & Photographic Equipment; and Primary Metals are the industries reporting paying higher prices for the month.

Prices %Higher %Same %Lower Net Index
January 2002 7 69 24 -17 43.9
December 2001 3 58 39 -36 33.2
November 2001 3 55 42 -39 32.0
October 2001 6 56 38 -32 33.3

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

Backlog of Orders

The Backlog of Orders Index failed to grow for the 21st consecutive month in January. ISM's Backlog of Orders Index (not seasonally adjusted) registered 44.5 percent indicating a slower rate of decline in manufacturers' backlogs than reported in December. Of the 89 percent of respondents who measure their backlog of orders, 16 percent reported greater backlogs, 27 percent reported smaller backlogs, and 57 percent reported no change from December. Food; Wood & Wood Products; and Electronic Components & Equipment are the industries reporting an increase in order backlog during the month.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
January 2002 89 16 57 27 -11 44.5
December 2001 88 13 53 34 -21 39.5
November 2001 89 14 49 37 -23 38.5
October 2001 87 12 48 40 -28 36.0

New Export Orders

ISM's New Export Orders Index for January registered 50.8 percent, an increase of 3.2 percentage points when compared to December's index of 47.6 percent. The industries reporting growth in new export orders in January are: Wood & Wood Products; Food; Paper; Transportation & Equipment; and Chemicals.

New Export
Orders
%Exporting %Better %Same %Worse Net Index
January 2002 73 10 79 11 -1 50.8
December 2001 79 12 68 20 -8 47.6
November 2001 74 13 73 14 -1 48.6
October 2001 76 7 71 22 -15 45.3

Imports

Imports of materials by manufacturers grew in January as the Imports Index registered 52.1 percent, a 1.8 percentage points increase when compared to December's report of 50.3 percent. The four industries reporting growth in import activity for January are: Printing & Publishing; Instruments & Photographic Equipment; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); and Industrial & Commercial Equipment & Computers.

Imports %Importing %Higher %Same %Lower Net Index
January 2002 75 9 81 10 -1 52.1
December 2001 74 12 75 13 -1 50.3
November 2001 72 11 75 14 -3 49.9
October 2001 73 10 73 17 -7 45.8

Buying Policy

Average commitment leadtime for Capital Expenditures rose 7 days to 93 days. Average leadtime for Production Materials declined 1 day to 45 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies was unchanged at 20 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
January 2002 27 6 20 20 21 6 93
December 2001 28 8 18 21 21 4 86
November 2001 29 7 16 20 22 6 92
October 2001 25 11 18 21 20 5 88
Production Materials              
January 2002 21 48 16 10 4 1 45
December 2001 23 45 18 9 3 2 46
November 2001 20 48 19 8 3 2 47
October 2001 24 40 24 8 3 1 44
MRO Supplies              
January 2002 54 37 8 1 0 0 20
December 2001 57 32 9 2 0 0 20
November 2001 55 32 11 2 0 0 21
October 2001 54 35 10 1 0 0 20

In Short Supply

No commodities reported in short supply.

Up in Price

No commodities reported up in price.

Down in Price

Aluminum — 11th month; Caustic Soda — 9th month; Copper — 8th month; Corrugated Containers — 12th month; Electricity; Energy — 5th month; Linerboard; Methanol; Natural Gas — 12th month; Newsprint; Paper — 3rd month; Plastic; Polyethylene; and Steel — 9th month.

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.

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, Customer 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 intrayear variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to nonmoveable 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 42.7 percent, over a period of time, indicates that the overall economy, or Gross Domestic Product (GDP), is generally expanding, below 42.7 percent, it is generally declining. The distance from 50 percent or 42.7 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 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. 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 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 February 2002 data will be released at 10:00 a.m. (ET) on March 1, 2002.



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