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May 2004 Manufacturing ISM Report On Business®

FOR RELEASE: June 1, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
PMI at 62.8%

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 May 2004.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in May for the 12th consecutive month, while the overall economy grew for the 31st 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 grew at a faster rate in May, continuing its recent strong performance. The rate of growth in New Orders and Production slowed slightly but was offset by a significant increase in Employment. Employment has not registered this high since April 1973, when it registered 62.6 percent."

ISM's Backlog of Orders Index indicates that order backlogs increased in May, and the Employment Index grew for the seventh consecutive month. ISM's Prices Index indicates that manufacturers once again experienced higher prices in their purchases. The New Export Orders and Import Indexes continue to grow in May.

Comments from respondents indicate demand is strong in most industries, but they also express major concerns about rising materials prices and the cost of energy in particular. A number of respondents mention adding permanent jobs, as well as adding temporary and seasonal workers. While there are mentions of allocation, extended leadtimes and low inventories, it appears that members are able to work through these issues at this time.

ISM's PMI registered 62.8 percent in May, an increase of 0.4 percentage point when compared to 62.4 percent in April. ISM's New Orders Index declined 2.2 percentage points from 65 percent in April to 62.8 percent in May. ISM's Production Index decreased 2.2 percentage points from 67 percent in April to 64.8 percent in May. The ISM Employment Index is at 61.9 percent for May, an increase of 4.1 percentage points when compared to the 57.8 percent reported in April.

ISM's Supplier Deliveries Index registered 69.4 percent, 2.3 percentage points higher than April's 67.1 percent. ISM's Inventories Index registered 49.3 percent in May, up from the 44.8 percent reported in April. ISM's Customers' Inventories Index for May is at 37 percent, a decrease of 3.5 percentage points compared to the April reading of 40.5 percent. ISM's Prices Index in May is 86 percent, 2 percentage points lower than the 88 percent reported in April.

ISM's Backlog of Orders Index decreased 3.5 percentage points, registering 63 percent in May compared to 66.5 percent in April. ISM's New Export Orders Index registered 60.6 percent, a decrease of 0.4 percentage point from April's 61 percent. ISM's Imports Index increased 1.3 percentage points to 59.8 percent in May, up from 58.5 percent in April.

"It appears that second-quarter growth will be very solid, and the momentum should carry over into the second half of the year. 2004 is shaping up as one of the better years for manufacturing. Many respondents indicate that order backlogs are growing for the first time in several years," said Ore.

In May, 19 industries reported growth: Industrial & Commercial Equipment & Computers; Wood & Wood Products; Instruments & Photographic Equipment; Chemicals; Electronic Components & Equipment; Glass, Stone & Aggregate; Textiles; Fabricated Metals; Paper; Furniture; Apparel; Miscellaneous*; Transportation & Equipment; Petroleum; Rubber & Plastic Products; Primary Metals; Leather; Printing & Publishing; and Food.

"Aluminum; Aluminum Extrusions; Aluminum Sheet; Butadiene; Cardboard; Caustic Soda; Chemicals; Coal; Copper and Copper Products; Corrugated Containers; Corrugated Products; Crude Oil; Diesel Fuel; DRAMS; Electric Components; Electric Motors; Electronic Components; Energy; Fasteners; Flash Memory; Freight; Fuel; Fuel Oil; Gasoline; Hardwood Lumber; HDPE; Integrated Circuits; Natural Gas; Paper; Particle Board; Plastics; Plastic Resin; Plywood; Pulp; Stainless Steel; Stainless Steel Bars; Stainless Steel Products; Steel; and Steel Products are the commodities listed as up in price. The commodities listed in short supply include Aluminum; Coal; Electronic Components; Galvanized Steel; Hot Rolled Steel; Semiconductors; Stainless Steel; and Steel. The commodities reported down in price are Caustic Soda; Copper; Eggs; Nickel and Steel Scrap," Ore stated.

MAY 2004 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
May vs Apr
Rate of Change
May vs Apr
PMI 62.8 Growing Faster
New Orders 62.8 Growing Slower
Production 64.8 Growing Slower
Employment 61.9 Growing Faster
Supplier Deliveries 69.4 Slowing Faster
Inventories 49.3 Contracting Slower
Customers' Inventories 37.0 Too Low Faster
Prices 86.0 Increasing Slower
Backlog of Orders 63.0 Growing Slower
New Export Orders 60.6 Growing Slower
Imports 59.8 Growing Faster

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

PMI

The PMI indicates that the manufacturing economy grew in May for the 12th consecutive month. The PMI for May registered 62.8 percent, an increase of 0.4 percentage point compared to the April reading of 62.4 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 May 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 May (62.5 percent) corresponds to a 7.2 percent increase in real gross domestic product (GDP). In addition, if the PMI for May (62.8 percent) is annualized, this corresponds to a 7.3 percent increase in GDP.

Month May'04 Apr'04 Mar'04 Feb'04 Jan'04
PMI% 62.8 62.4 62.5 61.4 63.6
Month Dec'03 Nov'03 Oct'03 Sep'03 Aug'03
PMI% 63.4 61.3 57.1 54.7 55.0
Month Jul'03 Jun'03 May'03 Apr'03 Mar'03
PMI% 52.6 50.4 50.0 46.2 46.6

New Orders

ISM's New Orders Index grew in May with a reading of 62.8 percent. The index is 2.2 percentage points lower than the 65 percent registered in April, and it is the 13th 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). Fifteen industries report increases for the month of May: Textiles; Wood & Wood Products; Chemicals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Rubber & Plastic Products; Glass, Stone & Aggregate; Paper; Instruments & Photographic Equipment; Transportation & Equipment; Miscellaneous*; Primary Metals; Furniture; Fabricated Metals; and Food.

New
Orders
%Better %Same %Worse Net Index
May 2004 48 38 14 +34 62.8
April 2004 51 42 7 +44 65.0
March 2004 50 41 9 +41 65.7
February 2004 49 41 10 +39 66.4

Production

ISM's Production Index is 64.8 percent in May, 2.2 percentage points lower than the 67 percent reported in April, reflecting the 13th consecutive month of growth. 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 May, 17 registered growth: Petroleum; Industrial & Commercial Equipment & Computers; Apparel; Paper; Instruments & Photographic Equipment; Chemicals; Fabricated Metals; Furniture; Glass, Stone & Aggregate; Wood & Wood Products; Miscellaneous*; Rubber & Plastic Products; Electronic Components & Equipment; Transportation & Equipment; Primary Metals; Food; and Textiles.

Production %Better %Same %Worse Net Index
May 2004 46 43 11 +35 64.8
April 2004 48 45 7 +41 67.0
March 2004 46 47 7 +39 65.5
February 2004 44 47 9 +35 63.9

Employment

ISM's Employment Index grew for the seventh consecutive month, following a 37-month trend of contraction. The index registered 61.9 percent in May compared to 57.8 percent in April, an increase of 4.1 percentage points. The last time the Employment Index registered higher than May's index was in April 1973, registering 62.6 percent. 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 17 industries reporting growth in employment during May are: Textiles; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Fabricated Metals; Furniture; Transportation & Equipment; Apparel; Electronic Components & Equipment; Instruments & Photographic Equipment; Primary Metals; Miscellaneous*; Food; Rubber & Plastic Products; Glass, Stone & Aggregate; Chemicals; Printing & Publishing; and Paper.

Employment %Higher %Same %Lower Net Index
May 2004 36 57 7 +29 61.9
April 2004 30 58 12 +18 57.8
March 2004 26 65 9 +17 57.0
February 2004 23 66 11 +12 56.3

Supplier Deliveries

ISM's Supplier Deliveries Index indicates that delivery performance is slower when comparing May to April. May's reading of 69.4 percent is an increase of 2.3 percentage points compared to April's reading of 67.1 percent. A reading above 50 percent indicates slower deliveries. The 17 industries reporting slower supplier deliveries in May are: Apparel; Fabricated Metals; Primary Metals; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Printing & Publishing; Electronic Components & Equipment; Miscellaneous*; Transportation & Equipment; Furniture; Glass, Stone & Aggregate; Wood & Wood Products; Paper; Textiles; Rubber & Plastic Products; Chemicals; and Food.

Supplier
Deliveries
%Slower %Same %Faster Net Index
May 2004 41 57 2 +39 69.4
April 2004 38 58 4 +34 67.1
March 2004 38 59 3 +35 67.9
February 2004 28 70 2 +26 62.1

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

Inventories

Manufacturers' inventories declined slightly in May as the index registered 49.3 percent, an increase of 4.5 percentage points when compared to April's 44.8 percent. The Inventories Index has registered under 50 percent for 52 consecutive months. 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 seven industries reporting higher inventories in May are: Leather; Instruments & Photographic Equipment; Printing & Publishing; Primary Metals; Glass, Stone & Aggregate; Electronic Components & Equipment; and Wood & Wood Products.

Inventories %Higher %Same %Lower Net Index
May 2004 19 61 20 -1 49.3
April 2004 15 61 24 -9 44.8
March 2004 18 63 19 -1 48.3
February 2004 20 63 17 +3 49.4

Customers' Inventories**

The May Customers' Inventories Index is at 37 percent, a decrease of 3.5 percentage points compared to the April reading of 40.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 36th consecutive month that the index has registered below 50 percent. Primary Metals is the only industry reporting higher customer inventories during May.

Customers'
Inventories
%
Reporting
%
Too
High
%
About
Right
%
Too
Low
Net Index
May 2004 70 6 62 32 -26 37.0
April 2004 73 11 59 30 -19 40.5
March 2004 78 8 63 29 -21 39.5
February 2004 76 7 63 30 -23 38.5

Prices**

ISM's Prices Index indicates manufacturers continued to pay higher prices in May. This is the 27th consecutive month the index has registered higher prices. May's index is at 86 percent, 2 percentage points lower than April's reading of 88 percent. In May, 74 percent of supply executives reported paying higher prices and 2 percent reported paying lower prices, while 24 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 19 industries reporting paying higher prices in May are: Tobacco; Printing & Publishing; Petroleum; Leather; Glass, Stone & Aggregate; Wood & Wood Products; Textiles; Food; Rubber & Plastic Products; Miscellaneous*; Furniture; Chemicals; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Paper; Fabricated Metals; Electronic Components & Equipment; Instruments & Photographic Equipment; and Primary Metals.

Prices %Higher %Same %Lower Net Index
May 2004 74 24 2 +72 86.0
April 2004 77 22 1 +76 88.0
March 2004 73 26 1 +72 86.0
February 2004 65 33 2 +63 81.5

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 63 percent, indicating manufacturers' backlogs in May were higher when compared to April. Of the 87 percent of respondents who report their backlog of orders, 42 percent reported greater backlogs, 16 percent reported smaller backlogs, and 42 percent reported no change from April. The 14 industries reporting an increase in order backlogs during the month are: Textiles; Apparel; Printing & Publishing; Paper; Furniture; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Electronic Components & Equipment; Miscellaneous*; Wood & Wood Products; Transportation & Equipment; Fabricated Metals; Chemicals; and Primary Metals.

Backlog
of Orders
%
Reporting
%
Greater
%
Same
%
Less
Net Index
May 2004 87 42 42 16 +26 63.0
April 2004 88 43 47 10 +33 66.5
March 2004 87 38 51 11 +27 63.5
February 2004 85 35 54 11 +24 62.0

New Export Orders

ISM's New Export Orders Index for May registered 60.6 percent, a decrease of 0.4 percentage point when compared to April's index of 61 percent. This is the 18th consecutive month of growth in export orders. The 12 industries reporting growth in new export orders in May are: Electronic Components & Equipment; Furniture; Industrial & Commercial Equipment & Computers; Chemicals; Fabricated Metals; Textiles; Primary Metals; Transportation & Equipment; Paper; Miscellaneous*; Rubber & Plastic Products; and Food.

New Export
Orders
%
Reporting
%
Better
%
Same
%
Worse
Net Index
May 2004 77 25 71 4 +21 60.6
April 2004 78 27 69 4 +23 61.0
March 2004 77 27 70 3 +24 62.0
February 2004 77 17 75 8 +9 54.9

Imports

Imports of materials by manufacturers grew during May as the Imports Index registered 59.8 percent. The index gained 1.3 percentage points when compared to April's index of 58.5 percent, indicating a faster rate of growth. The 10 industries reporting growth in import activity for May are: Furniture; Instruments & Photographic Equipment; Fabricated Metals; Industrial & Commercial Equipment & Computers; Textiles; Transportation & Equipment; Electronic Components & Equipment; Miscellaneous*; Food; and Chemicals.

Imports %
Reporting
%
Higher
%
Same
%
Lower
Net Index
May 2004 77 24 72 4 +20 59.8
April 2004 78 24 72 4 +20 58.5
March 2004 79 23 69 8 +15 56.8
February 2004 78 22 73 5 +17 60.2

*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 increased 4 days to 106 days. Average leadtime for Production Materials decreased 6 days to 44 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies decreased 1 day to 21 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
May 2004 25 9 15 19 22 10 106
April 2004 27 9 11 21 24 8 102
March 2004 26 8 13 22 23 8 102
February 2004 24 11 11 18 26 10 110
Production Materials              
May 2004 21 44 21 11 2 1 44
April 2004 22 39 21 13 3 2 50
March 2004 24 41 19 12 3 1 45
February 2004 20 40 24 10 5 1 49
MRO Supplies              
May 2004 55 35 7 2 1 0 21
April 2004 54 35 8 2 1 0 22
March 2004 50 39 8 3 0 0 22
February 2004 55 33 9 1 2 0 23

In Short Supply

Aluminum — 3rd month; Coal; Electronic Components — 5th month; Galvanized Steel; Hot Rolled Steel — 2nd month; Semiconductors; Stainless Steel — 5th month; and Steel — 5th month.

Up in Price

Aluminum — 7th month; Aluminum Extrusions; Aluminum Sheet; Butadiene; Cardboard; Caustic Soda*; Chemicals — 4th month; Coal; Copper* and Copper Products — 5th month; Corrugated Containers — 4th month; Corrugated Products; Crude Oil; Diesel Fuel — 3rd month; DRAMS; Electric Components — 4th month; Electric Motors; Electronic Components; Energy — 5th month; Fasteners — 3rd month; Flash Memory — 3rd month; Freight — 3rd month; Fuel; Fuel Oil — 5th month; Gasoline — 5th month; Hardwood Lumber; HDPE — 4th month; Integrated Circuits; Natural Gas — 22nd month; Paper — 3rd month; Particle Board — 4th month; Plastic Resin — 2nd month; Plastics — 4th month; Plywood; Pulp; Stainless Steel — 8th month; Stainless Steel Bars; Stainless Steel Products (various forms) — 2nd month; Steel — 8th month; and Steel Products (various forms) — 2nd month.

Down in Price

Caustic Soda* — 5th month; Copper*; Eggs; Nickel; 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 42.8 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 June 2004 data will be released at 10:00 a.m. (ET) on July 1, 2004.


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