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January 2005 Manufacturing ISM Report On Business®

FOR RELEASE: February 1, 2005

Contact: Terri Tracey
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3071
  e-mail: ttracey@ism.ws
PMI at 56.4%

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 2005. This report reflects the U.S. Department of Commerce's recently completed annual adjustment to the seasonal factors used to calculate the indexes.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in January for the 20th consecutive month, while the overall economy grew for the 39th 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. "January's PMI reflects continuing strength in manufacturing. Production and employment both accelerated during the month. Prices, particularly energy prices, continue to provide a challenge to buyers. However, the rate of increase of prices continues to decelerate, raising hopes that price inflation will moderate as the year advances. Inventory growth was significant in January, while supplier deliveries do not appear to be a problem based on a decelerating index. Additionally, only one commodity is listed in short supply."

Comments from respondents this month indicate a number of positives. Stainless steel supply appears to be improving, as shortages are less of an issue. Others mentioned end-of-year issues that require transition to new products or inventory policies. The most optimistic comments came from companies that produce capital goods, as they see that market continuing to experience strong demand both domestically and internationally.

ISM's PMI registered 56.4 percent in January, a decrease of 0.9 percentage point when compared to 57.3 percent in December. ISM's New Orders Index declined 6.1 percentage points from 62.6 percent in December to 56.5 percent in January. ISM's Production Index increased 1.1 percentage points from 56.7 percent in December to 57.8 percent in January. The ISM Employment Index is at 58.1 percent in January, an increase of 4.8 percentage points when compared to the 53.3 percent reported in December.

ISM's Supplier Deliveries Index registered 53.7 percent, 2.4 percentage points lower than December's 56.1 percent. ISM's Inventories Index registered 52.8 percent in January, the same as reported in December. ISM's Customers' Inventories Index for January is at 44.5 percent, up from 44 percent in December. ISM's Prices Index in January is 69 percent, 3 percentage points lower than the 72 percent reported in December.

ISM's Backlog of Orders Index for January declined 3.5 percentage points to 50.5 percent from 54 percent registered in December. ISM's New Export Orders Index registered 56.9 percent, a decrease of 2.2 percentage points from December's 59.1 percent. ISM's Imports Index increased 0.3 percentage point to 61.1 percent in January, up from 60.8 percent in December.

"January sets the tone for a strong first quarter. Even though the PMI is slightly lower, the month-over-month growth is still quite strong and will provide significant momentum for the remainder of Q1. Demand for exports continues to be quite strong, with a number of industries reporting significant growth. Inventories have now increased during seven of the last eight months, but still do not appear to be a problem as manufacturers' customers' inventories appear to still be too low," said Ore.

In January, 12 industries reported growth: Primary Metals; Furniture; Rubber & Plastic Products; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Miscellaneous*; Textiles; Chemicals; Electronic Components & Equipment; Apparel; and Food.

"Adhesives; Aluminum; Aluminum Products; Butadiene; Caustic Soda; Chemicals; Copper; Corrugated Containers; Diesel Fuel; Freight; High-Density Polyethylene Resins; MRO Items; Natural Gas (also reported down in price); Paper; Petroleum Products; Plastic Products; Plastics; Polyethylene; Polyethylene Film; Polypropylene Resins; PVC Products; Resins; Specialty Chemicals; Stainless Steel; Steel; Steel Products; Titanium Dioxide; and Vinyls are the commodities reported up in price. The commodities reported down in price are Gasoline; Natural Gas (also reported up in price) and Steel Scrap. Steel is the only commodity listed in short supply," Ore stated.

JANUARY 2005 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
Jan vs Dec
Rate of Change
Jan vs Dec
PMI 56.4 Growing Slower
New Orders 56.5 Growing Slower
Production 57.8 Growing Faster
Employment 58.1 Growing Faster
Supplier Deliveries 53.7 Slowing Slower
Inventories 52.8 Growing Same
Customers' Inventories 44.5 Too Low Slower
Prices 69.0 Increasing Slower
Backlog of Orders 50.5 Increasing Slower
New Export Orders 56.9 Growing Slower
Imports 61.1 Growing Faster

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

PMI

The PMI indicates that the manufacturing economy grew in January for the 20th consecutive month. The PMI for January registered 56.4 percent, a 0.9 percentage point decrease when compared to December's seasonally adjusted reading of 57.3 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 both the overall economy and the manufacturing sector are growing. The past relationship between the PMI and the overall economy indicates that the PMI for January (56.4 percent) corresponds to a 5 percent increase in GDP on an annual basis.

Month Jan'05 Dec'04 Nov'04 Oct'04 Sep'04
PMI% 56.4 57.3 57.6 57.5 59.1
Month Aug'04 Jul'04 Jun'04 May'04 Apr'04
PMI% 59.6 61.6 61.2 62.6 62.3
Month Mar'04 Feb'04 Jan'04 Dec'03 Nov'03
PMI% 62.3 62.1 62.8 62.1 61.3

New Orders

ISM's New Orders Index grew in January with a reading of 56.5 percent. The index is 6.1 percentage points lower than the seasonally adjusted 62.6 percent registered in December, and it is the 21st consecutive month the index has exceeded 50 percent. A New Orders Index above 51.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars). Ten industries reported increases for the month of January: Furniture; Transportation & Equipment; Primary Metals; Rubber & Plastic Products; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Miscellaneous*; Electronic Components & Equipment; Chemicals; and Food.

New Orders %Better %Same %Worse Net Index
January 2005 34 44 22 +12 56.5
December 2004 39 45 16 +23 62.6
November 2004 33 49 18 +15 60.7
October 2004 27 56 17 +10 59.3

Production

ISM's Production Index is 57.8 percent in January, 1.1 percentage points higher than the seasonally adjusted 56.7 percent reported in December. January is the 21st consecutive month of growth in the index. An index above 50 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in January, 11 registered growth: Rubber & Plastic Products; Primary Metals; Miscellaneous*; Industrial & Commercial Equipment & Computers; Furniture; Instruments & Photographic Equipment; Textiles; Chemicals; Transportation & Equipment; Food; and Electronic Components & Equipment.

Production %Better %Same %Worse Net Index
January 2005 30 54 16 +14 57.8
December 2004 30 51 19 +11 56.7
November 2004 28 56 16 +12 57.0
October 2004 29 56 15 +14 59.3

Employment

ISM's Employment Index grew for the 15th consecutive month, following a 37-month trend of contraction. The index registered 58.1 percent in January compared to 53.3 percent in December, an increase of 4.8 percentage points. An Employment Index above 48.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The 12 industries reporting growth in employment during January are: Furniture; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Textiles; Primary Metals; Rubber & Plastic Products; Miscellaneous*; Wood & Wood Products; Instruments & Photographic Equipment; Paper; Chemicals; and Electronic Components & Equipment.

Employment %Higher %Same %Lower Net Index
January 2005 23 67 10 +13 58.1
December 2004 19 67 14 +5 53.3
November 2004 20 71 9 +11 57.2
October 2004 20 66 14 +6 55.4

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 19th consecutive month in January. ISM's Supplier Deliveries Index for January registered 53.7 percent, a decrease of 2.4 percentage points compared to December's seasonally adjusted reading of 56.1 percent. A reading above 50 percent indicates slower deliveries. The eight industries reporting slower supplier deliveries in January are: Textiles; Paper; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Chemicals; Transportation & Equipment; Instruments & Photographic Equipment; and Food.

Supplier
Deliveries
%Slower %Same %Faster Net Index
January 2005 13 79 8 +5 53.7
December 2004 16 76 8 +8 56.1
November 2004 17 77 6 +11 57.8
October 2004 24 70 6 +18 59.5

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

Inventories

Manufacturers' inventories grew for the third consecutive month in January as ISM's Inventories Index registered 52.8 percent, the same as reported in December 2004 (seasonally adjusted). 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 chained 2000 dollars). The 10 industries reporting higher inventories in January are: Apparel; Primary Metals; Furniture; Transportation & Equipment; Textiles; Miscellaneous*; Paper; Food; Chemicals; and Fabricated Metals.

Inventories %Higher %Same %Lower Net Index
January 2005 20 67 13 +7 52.8
December 2004 24 56 20 +4 52.8
November 2004 18 60 22 -4 50.5
October 2004 17 61 22 -5 49.1

Customers' Inventories**

The January Customers' Inventories Index is at 44.5 percent, 0.5 percentage point higher compared to 44 percent reported in December. Respondents indicate that their customers do not have sufficient inventories on hand (inventories are too low) at this time. This is the 44th consecutive month that the index has registered below 50 percent. Three industries reported higher customer inventories during January and they are: Furniture; Food; and Fabricated Metals.

Customers'
Inventories
%Reporting % Too High % About Right % Too Low Net Index
January 2005 71 8 73 19 -11 44.5
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

Prices**

ISM's Prices Index indicates manufacturers continue to pay higher prices in January. This is the 35th consecutive month the index has registered higher prices. January's index is at 69 percent, 3 percentage points lower than December's reading of 72 percent. In January, 45 percent of supply executives reported paying higher prices and 7 percent reported paying lower prices, while 48 percent reported that prices were unchanged from the preceding month.

A Prices Index above 47.1 percent, over time, is generally consistent with a increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. In January, 17 industries reported paying higher prices: Petroleum; Textiles; Paper; Glass, Stone & Aggregate; Printing & Publishing; Food; Chemicals; Rubber & Plastic Products; Miscellaneous*; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Instruments & Photographic Equipment; Primary Metals; Electronic Components & Equipment; Furniture; and Fabricated Metals.

Prices %Higher %Same %Lower Net Index
January 2005 45 48 7 +38 69.0
December 2004 52 40 8 +44 72.0
November 2004 55 38 7 +48 74.0
October 2004 61 35 4 +57 78.5

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 50.5 percent, indicating manufacturers' backlogs in January continued to grow but at a slower rate when compared to December. Of the 84 percent of respondents who report their backlog of orders, 26 percent reported greater backlogs, 25 percent reported smaller backlogs, and 49 percent reported no change from December. The seven industries reporting an increase in order backlogs during the month are: Primary Metals; Furniture; Rubber & Plastic Products; Transportation & Equipment; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; and Printing & Publishing.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
January 2005 84 26 49 25 +1 50.5
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

New Export Orders

ISM's New Export Orders Index for January registered 56.9 percent, a decrease of 2.2 percentage points when compared to December's seasonally adjusted index of 59.1 percent. This is the 37th consecutive month of growth in export orders. The 11 industries reporting growth in new export orders in January are: Textiles; Primary Metals; Apparel; Miscellaneous*; Food; Industrial & Commercial Equipment & Computers; Chemicals; Electronic Components & Equipment; Transportation & Equipment; Rubber & Plastic Products; and Fabricated Metals.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
January 2005 78 18 77 5 +13 56.9
December 2004 75 23 70 7 +16 59.1
November 2004 77 15 79 6 +9 55.6
October 2004 77 15 80 5 +10 56.4

Imports

Imports of materials by manufacturers grew during January as the Imports Index registered 61.1 percent. The index increased 0.3 percentage point when compared to December's seasonally adjusted index of 60.8 percent, indicating a slightly faster rate of growth. The 12 industries reporting growth in import activity for January are: Apparel; Furniture; Miscellaneous*; Transportation & Equipment; Fabricated Metals; Food; Electronic Components & Equipment; Printing & Publishing; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; and Chemicals.

Imports %Reporting %Higher %Same %Lower Net Index
January 2005 79 23 74 3 +20 61.1
December 2004 79 27 67 6 +21 60.8
November 2004 80 21 74 5 +16 58.8
October 2004 79 21 72 7 +14 59.2

*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 rose 1 day to 106 days. Average leadtime for Production Materials rose 1 day to 45 days. Average leadtime for Maintenance, Repair and Operating (MRO) supplies rose 1 day to 21 days.

  Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
January 2005 23 11 12 21 24 9 106
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
Production Materials              
January 2005 22 42 21 11 3 1 45
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
MRO Supplies              
January 2005 56 31 11 2 0 0 21
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

In Short Supply

Steel — 13th month.

Up in Price

Adhesives; Aluminum — 15th month; Aluminum Products — 4th month; Butadiene — 2nd month; Caustic Soda — 9th month; Chemicals — 12th month; Copper — 4th month; Corrugated Containers — 12th month; Diesel Fuel — 5th month; Freight — 11th month; High-Density Polyethylene Resins; MRO Items; Natural Gas* — 30th month; Paper — 11th month; Petroleum Products; Plastic Products (various forms) — 12th month; Plastics — 6th month; Polyethylene — 5th month; Polyethylene Film; Polypropylene Resins; PVC Products (various forms); Resins — 6th month; Specialty Chemicals; Stainless Steel — 5th month; Steel — 16th month; Steel Products (various forms) — 6th month; Titanium Dioxide; and Vinyls — 2nd month.

Down in Price

Gasoline — 2nd month; Natural Gas* — 3rd month; and Steel Scrap.

*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 42.7 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 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 February 2004 data will be released at 10:00 a.m. (ET) on March 1, 2005.



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