July 2001 Manufacturing Report On Business®

FOR RELEASE: August 1, 2001

Contact: Kristen Kioa
  NAPM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
MANUFACTURING CONTINUES TO SLOW IN JULY SAY PURCHASING AND SUPPLY EXECUTIVES IN LATEST MANUFACTURING NAPM REPORT ON BUSINESS®

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 July 2001.

Purchasing Managers' Index (PMI) at 43.6%

Production, New Orders Contracting
Prices, Inventories, Employment Rapidly Declining

(Tempe, Arizona) — Economic activity in the manufacturing sector declined for the 12th consecutive month in July while the overall economy grew modestly during the month say the nation's purchasing and supply management executives in the latest Manufacturing NAPM Report On Business®.

The report was issued today by Norbert J. Ore, C.P.M., chair of the National Association of Purchasing Management's Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation. "The manufacturing sector continued to decline in July as has been the trend since August 2000. The rate of decline accelerated during the month as new orders softened somewhat from June and inventory liquidation accelerated. Manufacturers continue to reduce payrolls and capital expenditures in cost cutting efforts. Though the Prices Index appears positive as most manufacturers are enjoying lower raw material costs, but it is also indicative of deteriorating pricing power for their finished goods."

NAPM's Backlog of Orders Index indicates that order backlogs declined for the 15th consecutive month. NAPM's Supplier Deliveries Index continues to reflect faster deliveries. Manufacturing employment declined in July as the index fell below the breakeven point (an index of 50 percent) for the 10th consecutive month. NAPM's Prices Index remained below 50 percent as manufacturers experienced lower prices for the fifth consecutive month after 22 months of paying higher prices. New Export Orders failed to grow in July for the fourth consecutive month. July's Imports Index failed to grow for the seventh consecutive month. Comments from purchasing and supply managers this month reflect a sense of relief with regard to energy prices, but the two most used words were "slow" and "flat." There were a few respondents expressing a sense of optimism and they were from construction-related industries.

NAPM's Purchasing Managers' Index is 43.6 percent in July, a decrease of 1.1 percentage points from the 44.7 percent reported in June. NAPM's Production Index rose 0.2 percentage point from 46.2 percent in June to 46.4 percent in July. NAPM's New Orders Index declined 2.3 percentage points from 48.6 percent in June to 46.3 percent in July. NAPM's Backlog of Orders Index rose from 42 percent in June to 42.5 percent in July, but continues to indicate smaller backlogs. NAPM's Supplier Deliveries Index declined to 47.4 percent in July, indicating faster deliveries during the month. The NAPM Employment Index is at 37.2 percent for July, an increase of 0.9 percentage point when compared to the 36.3 percent reported in June. NAPM's Prices Index in July is 38.7 percent, a decrease of 3.6 percentage points from June's 42.3 percent.

NAPM's Inventories Index is at 35.8 percent indicating a faster rate of inventory liquidation when compared to June's 40.8 percent. Responding to a special monthly question concerning customers' inventories of products purchased from their organizations, 9 percent of the purchasing and supply executives felt they were too high (down from 14 percent in June), while 19 percent felt they were too low (up from 18 percent in June) and 72 percent thought they were about right (up from 68 percent in June). NAPM's New Export Orders Index registered 48.2 percent, up from June's 45.5 percent. Imports of materials by manufacturers continued to decline as NAPM's Imports Index is 47.3 percent in July, down from June's 48 percent.

"The overall picture is one of continued decline in manufacturing activity during the month of July," added Ore. "The manufacturing sector is in its 12th month of decline and appears to continue to lack drivers that will stimulate recovery. Though this month's report indicates energy prices are higher, the major commodities — natural gas, gasoline, and diesel — all indicate lower prices and this should ease cost pressures. Manufacturers continue to back off from major capital investments as capital expenditures again hit a low for the history of the index."

Of the 20 industries in the manufacturing sector, three reported growth: Rubber & Plastic Products; Glass, Stone & Aggregate; and Instruments & Photographic Equipment.

"Caustic Soda is the only commodity reported on the Short Supply List. Energy is the lone commodity with reports of price increases. The commodities reported down in price are: Aluminum, Aluminum Extrusions, Caustic Soda, Copper, Corrugated Containers, Diesel, Fuel, Gasoline, Methanol, Natural Gas, Paper, Plastic Resins, High Density Polyethylene, Polyethylene, Polypropylene, Propylene, Resins, Steel, Wood Pulp and Zinc," Ore stated.

JULY 2001 NAPM BUSINESS SURVEY AT A GLANCE
Series July
Index
Direction
July vs June
Rate of Change
July vs June
PMI 43.6 Contracting Faster
Production 46.4 Contracting Slower
New Orders 46.3 Contracting Faster
Backlog of Orders 42.5 Contracting Slower
Supplier Deliveries 47.4 Faster Faster
Inventories 35.8 Contracting Faster
Employment 37.2 Contracting Slower
Prices 38.7 Contracting Faster
New Export Orders 48.2 Contracting Slower
Imports 47.3 Contracting Faster

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

Purchasing Managers' Index (PMI)

The Purchasing Managers' Index (PMI) indicates that the manufacturing economy failed to grow during the month of July with an index of 43.6 percent, indicating a faster rate of decline when compared to June's PMI of 44.7 percent. This is the 12th consecutive month that the manufacturing sector has failed to grow. 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 July PMI indicates marginal growth in the overall economy while the manufacturing sector continues to decline. Ore added, "The past relationship between the PMI and the overall economyindicates that the average PMI for the months of January through July (42.8 percent) corresponds to zero growth in real gross domestic product (GDP). However, if the PMI for July (43.6 percent) turned out to be the annual average for 2001, this would correspond to a 0.3 percent increase in GDP."

Month Jul'01 Jun'01 May'01 Apr'01 Mar'01
PMI% 43.6 44.7 42.1 43.2 43.1
Month Feb'01 Jan'01 Dec'00 Nov'00 Oct'00
PMI% 41.9 41.2 44.3 47.9 48.3
Month Sep'00 Aug'00 Jul‘00 Jun'00 May'00
PMI% 49.6 49.9 51.7 52.1 53.1

Production

NAPM's Production Index rose to 46.4 percent in July up from 46.2 percent in June. This is the eighth consecutive month that the index has fallen below 50 percent. Of the 20 industries reporting, those registering growth in July are: Instruments & Photographic Equipment; Rubber & Plastic Products; Printing & Publishing; and Food. An index above 49.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures.

Production %Better %Same %Worse Net Index
July 2001 19 50 31 -12 46.4
June 2001 18 56 26 -8 46.2
May 2001 19 52 29 -10 42.7
April 2001 21 50 29 -8 42.9

New Orders

NAPM's New Orders Index failed to grow in July for the 13th consecutive month. The index is at 46.3 percent representing a decrease of 2.3 percentage points when compared to June's 48.6 percent. A New Orders Index above 50.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 1987 dollars). For the month of July, six industries reported higher rates of increase in new orders. They were (listed in order): Rubber & Plastic Products; Glass, Stone & Aggregate; Textiles; Instruments & Photographic Products; Food; and Printing & Publishing.

New Orders %Better %Same %Worse Net Index
July 2001 23 49 28 -5 46.3
June 2001 25 49 26 -1 48.6
May 2001 25 45 30 -5 45.5
April 2001 28 45 27 +1 45.9

Backlog of Orders

The Backlog of Orders Index failed to grow for the 15th consecutive month in July. NAPM's Backlog of Orders Index (not seasonally adjusted) registered 42.5 percent indicating a slower rate of decline in manufacturers' backlogs than reported in June. Of the 89 percent of respondents who measure their backlog of orders, 15 percent reported greater backlogs, 30 percent reported smaller backlogs, and 55 percent reported no change from June. Rubber & Plastic Products was the only industry reporting an increased backlog of orders during the month.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
July 2001 89 15 55 30 -15 42.5
June 2001 90 15 54 31 -16 42.0
May 2001 90 14 52 34 -20 40.0
April 2001 90 16 55 29 -13 43.5

Supplier Deliveries

NAPM's Supplier Deliveries Index in July indicates delivery performance is faster when compared to June (a reading below 50 percent indicates faster deliveries). At 47.4 percent, the index is 0.6 percentage point lower than June's 48 percent. The industries reporting slower supplier deliveries in July were: Furniture; Primary Metals; and Industrial & Commercial Equipment & Computers.

Supplier
Deliveries
%Slower %Same %Faster Net Index
July 2001 5 86 9 -4 47.4
June 2001 5 85 10 -5 48.0
May 2001 6 80 14 -8 45.7
April 2001 5 85 10 -5 47.4

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 July as the Inventories Index registered 35.8 percent, down from the 40.8 percent reported in June. The Inventories Index has been under 50 percent for 18 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). The only industry reporting higher inventory was Miscellaneous (a preponderance of jewelry, toys, sporting goods, and musical instruments).

Inventories %Higher %Same %Lower Net Index
July 2001 9 53 38 -29 35.8
June 2001 14 52 34 -20 40.8
May 2001 13 51 36 -23 38.7
April 2001 16 49 35 -19 39.6

Employment

NAPM's Manufacturing Employment Index fell below 50 percent in July for the 10th consecutive month. The index registered 37.2 percent in July compared to 36.3 percent in June, an increase of 0.9 percentage point.

An Employment Index above 47.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. Rubber & Plastic Products is the only industry indicating growth in employment during the month.

Employment %Higher %Same %Lower Net Index
July 2001 8 59 33 -25 37.2
June 2001 10 56 34 -24 36.3
May 2001 11 53 36 -25 35.0
April 2001 10 59 31 -21 38.1

Prices

NAPM's Prices Index indicates manufacturers paid lower prices in July. With the index at 38.7 percent, this marks the fifth consecutive month the index has been below 50 percent. The index is 3.6 percentage points lower than June's 42.3 percent, and the lowest the index has been since February 1999. In July, 7 percent of purchasing and supply executives reported paying higher prices and 28 percent reported paying lower prices, while 65 percent reported that prices were unchanged from the preceding month.

A Prices Index below 46.4 percent, over time, is generally consistent with a decrease in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. Food is the only industry reporting paying higher prices.

Prices %Higher %Same %Lower Net Index
July 2001 7 65 28 -21 38.7
June 2001 13 61 26 -13 42.3
May 2001 14 65 21 -7 45.2
April 2001 18 63 19 -1 48.9

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

New Export Orders

NAPM's New Export Orders Index for July registered 48.2 percent, 2.7 percentage points higher than June's index of 45.5 percent. The Index has fallen below 50 percent for four consecutive months. Industries reporting growth in new export orders in July were: Food; Electronic Components & Equipment; and Rubber & Plastic Products.

New Export
Orders
%Exporting %Better %Same %Worse Net Index
July 2001 77 12 73 15 -3 48.2
June 2001 81 8 78 14 -6 45.5
May 2001 77 6 80 14 -8 45.6
April 2001 79 10 77 13 -3 47.3

Imports

Imports of materials by manufacturers continued to decline in July as the Imports Index registered 47.3 percent, a 0.7 percentage point decrease when compared to June's report of 48 percent. The five industries reporting growth in import activity for July were: Instruments & Photographic Equipment; Paper; Printing & Publishing; Chemicals; and Fabricated Metals.

Imports %Importing %Higher %Same %Lower Net Index
July 2001 74 9 76 15 -6 47.3
June 2001 77 9 79 12 -3 48.0
May 2001 77 8 81 11 -3 46.6
April 2001 79 9 78 13 -4 47.2

Buying Policy

Average commitment leadtime for Capital Expenditures declined 6 days to 89 days. Average leadtime for Production Materials declined 5 days to 45 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies declined 4 days to 20 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
July 2001 26 8 16 24 22 4 89
June 2001 25 7 19 21 22 6 95
May 2001 19 9 19 21 25 7 104
April 2001 23 8 15 19 27 8 107
Production Materials              
July 2001 24 40 24 7 4 1 45
June 2001 22 43 19 9 5 2 50
May 2001 23 40 23 10 3 1 45
April 2001 26 38 23 8 4 1 45
MRO Supplies              
July 2001 53 37 8 2 0 0 20
June 2001 49 38 8 4 1 0 24
May 2001 53 37 7 2 1 0 22
April 2001 48 40 10 2 0 0 22

In Short Supply

Caustic Soda — 11th month.

Up in Price

Energy — 3rd month.

Down in Price

Aluminum — 5th month; Aluminum Extrusions; Caustic Soda — 3rd month; Copper — 2nd month; Corrugated Containers — 6th month; Diesel; Fuel; Gasoline; Methanol; Natural Gas — 6th month; Paper — 4th month; Plastic Resins; High Density Polyethylene — 2nd month; Polyethylene; Polypropylene — 2nd month; Propylene — 3rd month; Resins — 2nd month; Steel — 3rd month; Wood Pulp — 3rd month; and Zinc.

Data and Method of Presentation

The Manufacturing NAPM 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, 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 (New Orders, Production, Supplier Deliveries, Inventories, and Employment) with varying weights.

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, NAPM 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 NAPM Report On Business® is published monthly by the National Association of Purchasing Management, the largest supply management research and education organization in the United States. NAPM is comprised of 180 affiliates with more than 48,000 members in the United States. 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 NAPM Report On Business® is posted on NAPM's Web site at www.ism.ws on the first business day of every month after 10:10 a.m. (ET).

The next Manufacturing NAPM Report On Business® featuring the August 2001 data will be released at 10:00 a.m. (ET) on September 4, 2001.



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