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February 2003 Manufacturing ISM Report On Business®

FOR RELEASE: March 3, 2003

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
PMI at 50.5%

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 February 2003.

Production, New Orders Growing
Employment, Inventories Decline
Supplier Deliveries Slowing

(Tempe, Arizona) — Economic activity in the manufacturing sector grew for the fourth consecutive month. The overall economy grew for the 16th 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. "The manufacturing sector continued to grow in February, but the rate of growth slowed when compared to January. While Production remained strong, there was a significant slowing in the rate of growth of New Orders. Manufacturing jobs continue to decline as the Employment Index's rate of decline accelerated."

ISM's Backlog of Orders Index indicates that order backlogs declined for the eighth consecutive month, while ISM's Supplier Deliveries Index reflects slower deliveries for the 14th consecutive month. Manufacturing employment continued to decline in February as the index remained below the breakeven point (an index of 50 percent) for the 29th consecutive month. ISM's Prices Index is above 50 percent as manufacturers experienced higher prices for the 12th consecutive month. New Export Orders grew in February for the 14th consecutive month. February's Imports Index grew for the fourth consecutive month.

Comments from purchasing and supply executives are quite mixed. While there is some evidence of business picking up, particularly in electronics, many express concerns. Higher energy prices are squeezing already thin margins. The threat of war is viewed as a major deterrent in a number of industries.

ISM's PMI is 50.5 percent in February, a decrease of 3.4 percentage points when compared to 53.9 in January. ISM's New Orders Index declined 7.4 percentage points from 59.7 percent in January to 52.3 percent in February. ISM's Production Index declined 0.9 percentage point from 56.3 percent in January to 55.4 percent in February. The ISM Employment Index is at 42.8 percent for February, a decrease of 4.8 percentage points when compared to the 47.6 percent reported in January.

ISM's Supplier Deliveries Index registered 53.3 percent, 0.7 percentage point higher than January's 52.6 percent. ISM's Inventories Index declined to 43.8 percent from 45.4 percent in January. ISM's Customers' Inventories Index for February is at 46 percent, an increase of 3.5 percentage points compared to the January reading of 42.5 percent. ISM's Prices Index in February is 65.5 percent, an increase of 8 percentage points from January's 57.5 percent. ISM's Backlog of Orders Index gained 4 percentage points, registering 49 percent in February compared to 45 percent in January.

ISM's New Export Orders Index registered 55.5 percent, down 0.1 percentage point from January's 55.6 percent. ISM's Imports Index declined from 59 percent in January to 55.4 percent in February.

"Supply managers are certainly being challenged by current business conditions. While volumes seem to fluctuate, prices are rising on many commodities pushed by higher energy prices," said Ore.

Of the 20 industries in the manufacturing sector, 10 industries reported growth: Tobacco; Apparel; Electronic Components & Equipment; Wood & Wood Products; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Food; Chemicals; Textiles; Transportation & Equipment; and Instruments & Photographic Equipment.

"There were no reports of commodities in short supply. Commodities reported up in price are: Aluminum, Caustic Soda, Chemicals, Copper, Diesel Fuel, Energy, Ethylene, Fuel Oil, Gasoline, Methanol, Natural Gas, Nickel, Oil, Packaging, Plastic, Plastic Products, Plastic Resin, Plastic Shrink Wrap, Poly Bags, Polyethylene, Polyethylene Resin, Propylene, Resin, Steel, Styrene, and Titanium Dioxide. The only commodity reported down in price is Corrugated Containers," Ore stated.

FEBRUARY 2003 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
Feb vs. Jan
Rate of Change
Feb vs. Jan
PMI 50.5 Growing Slower
New Orders 52.3 Growing Slower
Production 55.4 Growing Slower
Employment 42.8 Contracting Faster
Supplier Deliveries 53.3 Slowing Faster
Inventories 43.8 Contracting Faster
Customers' Inventories 46.0 Too Low Slower
Prices 65.5 Increasing Faster
Backlog of Orders 49.0 Contracting Slower
New Export Orders 55.5 Growing Slower
Imports 55.4 Growing Slower

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

PMI

The PMI indicates that the manufacturing economy grew for the fourth consecutive month in February following one month of decline. With the index at 50.5 percent, this represents a decrease of 3.4 percentage points compared to the January reading of 53.9 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 42.9 percent, over a period of time, generally indicates an expansion of the overall economy. The February PMI indicates that both the overall economy and the manufacturing sector are growing. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (52.2 percent) corresponds to a 3.4 percent increase in real gross domestic product (GDP). However, if the PMI for February (50.5 percent) turned out to be the annual average for 2003, this would correspond to a 2.8 percent increase in GDP."

Month Feb'03 Jan'03 Dec'02 Nov'02 Oct'02
PMI% 50.5 53.9 55.2 50.5 49.7
Month Sep'02 Aug'02 Jul'02 Jun'02 May'02
PMI% 50.7 50.3 50.7 55.2 54.7
Month Apr'02 Mar'02 Feb'02 Jan'02 Dec'01
PMI% 53.3 54.7 53.8 49.8 48.5

New Orders

ISM's New Orders Index grew at a slower rate in February with a reading of 52.3 percent. The index is 7.4 percentage points lower than the 59.7 percent registered in January, and is the sixth consecutive month that the Index has been above 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). Industries reporting increases for the month of February are: Tobacco; Apparel; Electronic Components & Equipment; Food; Transportation & Equipment; Chemicals; Wood & Wood Products; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Instruments & Photographic Equipment; Primary Metals; and Industrial & Commercial Equipment & Computers.

New Orders %Better %Same %Worse Net Index
February 2003 30 48 22 +8 52.3
January 2003 33 46 21 +12 59.7
December 2002 33 41 26 +7 62.9
November 2002 22 51 27 -5 52.4

Production

ISM's Production Index is 55.4 percent in February, 0.9 percentage point lower than the 56.3 percent reported in January. This is the 15th consecutive month of growth in production. 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 20 industries reporting in February, the following registered growth: Tobacco; Apparel; Electronic Components & Equipment; Wood & Wood Products; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Textiles; Food; Transportation & Equipment; Chemicals; Rubber & Plastic Products; and Printing & Publishing.

Production %Better %Same %Worse Net Index
February 2003 28 54 18 +10 55.4
January 2003 27 51 22 +5 56.3
December 2002 25 54 21 +4 56.6
November 2002 22 60 18 +4 54.9

Employment

ISM's Manufacturing Employment Index remained below 50 percent in February for the 29th consecutive month. The index registered 42.8 percent in February compared to 47.6 percent in January, a decrease of 4.8 percentage points. An Employment Index above 47.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The two industries reporting growth in employment during February are: Apparel and Wood & Wood Products.

Employment %Higher %Same %Lower Net Index
February 2003 10 65 25 -15 42.8
January 2003 11 69 20 -9 47.6
December 2002 11 70 19 -8 48.2
November 2002 9 69 22 -13 45.1

Supplier Deliveries

ISM's Supplier Deliveries Index indicates delivery performance is slowing in February with a reading of 53.3 percent, an increase of 0.7 percentage point when compared to January's reading of 52.6 percent (a reading above 50 percent indicates slower deliveries). The 11 industries reporting slower supplier deliveries in February are: Textiles; Primary Metals; Furniture; Wood & Wood Products; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Glass, Stone, & Aggregate; Rubber & Plastic Products; Electronic Components & Equipment; Chemicals; Industrial & Commercial Equipment & Computers; and Printing & Publishing.

Supplier
Deliveries
%Slower %Same %Faster Net Index
February 2003 9 88 3 +6 53.3
January 2003 9 85 6 +3 52.6
December 2002 8 87 5 +3 52.6
November 2002 11 80 9 +2 51.8

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

Inventories

The rate of liquidation of manufacturers' inventories accelerated in February as the Inventories Index registered 43.8 percent. This compares to 45.4 percent reported in January. The Inventories Index has been under 50 percent for 37 consecutive months. An Inventories Index greater than 42.1 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 six industries reporting higher inventories in February are: Apparel; Instruments & Photographic Equipment; Food; Furniture; Glass, Stone, & Aggregate; and Rubber & Plastic Products.

Inventories %Higher %Same %Lower Net Index
February 2003 15 61 24 -9 43.8
January 2003 18 53 29 -11 45.4
December 2002 16 56 28 -12 46.2
November 2002 13 55 32 -19 43.0

Customers' Inventories

The Customers' Inventories Index is at 46 percent, an increase of 3.5 percentage points compared to the January reading of 42.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 21st consecutive month that the index has registered below 50. Glass, Stone, & Aggregate; Primary Metals; Industrial & Commercial Equipment & Computers; and Food are the industries reporting excessive customers' inventories during February.

Customers'
Inventories
%Reporting % Too High % About Right % Too Low Net Index
February 2003 69 13 66 21 -8 46.0
January 2003 79 10 65 25 -15 42.5
December 2002 82 10 66 24 -14 43.0
November 2002 80 12 69 19 -7 46.5

Prices

ISM's Prices Index (not seasonally adjusted, effective with January 2003 seasonal adjustments) indicates manufacturers continued to pay higher prices in February. This is the 12th consecutive month the index has registered higher prices. With the index at 65.5 percent, it is 8 percentage points higher than January's 57.5 percent. In February, 40 percent of supply executives reported paying higher prices and 9 percent reported paying lower prices, while 51 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. The industries reporting paying higher prices for February are: Tobacco; Rubber & Plastic Products; Textiles; Chemicals; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Wood & Wood Products; Paper; Furniture; Primary Metals; Printing & Publishing; Instruments & Photographic Equipment; Food; Glass, Stone, & Aggregate; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; and Transportation & Equipment.

Prices %Higher %Same %Lower Net Index
February 2003 40 51 9 +31 65.5
January 2003 27 61 12 +15 57.5
December 2002 22 66 12 +10 56.9
November 2002 18 70 12 +6 55.7

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 (not seasonally adjusted) registered 49 percent, indicating a slower rate of decline in manufacturers' backlogs as the index gained 4 percentage points from January's report of 45 percent. This is the eighth consecutive month that the Backlog of Orders Index has failed to grow. Of the 88 percent of respondents who report their backlog of orders, 22 percent reported greater backlogs, 24 percent reported smaller backlogs, and 54 percent reported no change from January. The industries reporting an increase in order backlogs during the month are: Wood & Wood Products; Electronic Components & Equipment; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Transportation & Equipment; Chemicals; and Industrial & Commercial Equipment & Computers.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
February 2003 88 22 54 24 -2 49.0
January 2003 88 19 52 29 -10 45.0
December 2002 88 18 57 25 -7 46.5
November 2002 87 12 61 27 -15 42.5

New Export Orders

ISM's New Export Orders Index for February registered 55.5 percent, a decrease of 0.1 percentage point when compared to January's index of 55.6 percent. This is the 14th consecutive month of growth in export orders. The industries reporting growth in new export orders in February are: Apparel; Textiles; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Instruments & Photographic Equipment; Chemicals; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Fabricated Metals; Electronic Components & Equipment; and Primary Metals.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
February 2003 75 16 77 7 +9 55.5
January 2003 74 13 82 5 +8 55.6
December 2002 76 13 75 12 +1 52.5
November 2002 76 12 76 12 0 50.6

Imports

Imports of materials by manufacturers grew during February as the Imports Index registered 55.4 percent. The index declined 3.6 percentage points when compared to January's index of 59 percent. The nine industries reporting growth in import activity for February are: Apparel; Textiles; Furniture; Glass, Stone, & Aggregate; Industrial & Commercial Equipment & Computers; Primary Metals; Chemicals; Electronic Components & Equipment; and Fabricated Metals.

Imports %Reporting %Higher %Same %Lower Net Index
February 2003 77 15 76 9 +6 55.4
January 2003 77 19 76 5 +14 59.0
December 2002 76 18 73 9 +9 54.8
November 2002 75 14 75 11 +3 53.1

Buying Policy

Average commitment leadtime for Capital Expenditures declined two days to 100 days. Average leadtime for Production Materials remained unchanged at 48 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies declined one day to 18 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
February 2003 24 8 16 24 20 8 100
January 2003 25 6 15 24 22 8 102
December 2002 23 8 11 21 29 8 110
November 2002 25 8 14 24 21 8 100
 
Production Materials              
February 2003 19 47 19 10 3 2 48
January 2003 22 45 18 9 4 2 48
December 2002 19 44 21 10 4 2 50
November 2002 22 43 19 11 3 2 48
 
MRO Supplies              
February 2003 62 29 8 1 0 0 18
January 2003 58 33 6 3 0 0 19
December 2002 57 32 9 2 0 0 20
November 2002 60 30 7 3 0 0 19

In Short Supply

There are no commodities on the short supply list.

Up in Price

Aluminum; Caustic Soda — 9th month; Chemicals — 2nd month; Copper; Diesel Fuel; Energy — 2nd month; Ethylene; Fuel Oil; Gasoline — 2nd month; Methanol — 2nd month; Natural Gas — 7th month; Nickel — 2nd month; Oil — 2nd month; Packaging; Plastic — 2nd month; Plastic Products; Plastic Resin, Plastic Shrink Wrap; Poly Bags; Polyethylene; Polyethylene Resin; Propylene; Resin — 2nd month; Steel — 2nd month; Styrene; and Titanium Dioxide.

Down in Price

Corrugated Containers — 2nd month.

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 42.9 percent, over a period of time, indicates that the overall economy, or Gross Domestic Product (GDP), is generally expanding; below 42.9 percent, it is generally declining. The distance from 50 percent or 42.9 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 March 2003 data will be released at 10:00 a.m. (ET) on April 1, 2003.



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