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July 2002 Manufacturing ISM Report On Business®

FOR RELEASE: August 1, 2002

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 July 2002.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew for the sixth consecutive month in July. The overall economy grew for the ninth 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. "For manufacturing, July was only slightly better than June. The PMI declined, but still indicated growth as 12 industries reported improvement in July. The decline in the PMI was primarily driven by a weak showing in July's new orders, which may be due to a pause in inventory replenishment."

ISM's Backlog of Orders Index indicates that order backlogs declined after five consecutive months of growth. ISM's Supplier Deliveries Index reflects slower deliveries for the seventh consecutive month. Manufacturing employment continued to decline in July as the index remained below the breakeven point (an index of 50 percent) for the 22nd consecutive month. ISM's Prices Index is above 50 percent as manufacturers experienced higher prices for the fifth consecutive month. New Export Orders grew in July for the seventh consecutive month. July's Imports Index decelerated, while still registering growth for the eighth consecutive month.

Comments from purchasing and supply executives reflect a wide range of concerns. Some indicate that business is improving, but question whether it will continue. Others are experiencing declines and question if we have hit the bottom. Issues related to energy costs seem to have abated while the 201 steel tariffs are seemingly presenting problems to a number of industries — steel fabricators in particular.

ISM's PMI is 50.5 percent in July, a decrease of 5.7 percentage points when compared to 56.2 percent reported in June. ISM's New Orders Index declined from 60.8 percent in June to 50.4 percent in July. ISM's Production Index declined 5.7 percentage points from 61.4 percent in June to 55.7 percent in July. The ISM Employment Index is at 45 percent for July, a decrease of 4.7 percentage points when compared to the 49.7 percent reported in June.

ISM's Supplier Deliveries Index registered 54.9 percent, compared to 55.2 percent in June. ISM's Inventories Index declined to 41.8 percent. ISM's Customers' Inventories Index for July is at 42.5 percent, a decrease of 2 percentage points when compared to June's 44.5 percent. ISM's Prices Index in July is 68.3 percent, an increase of 2.8 percentage points from June's 65.5 percent. ISM's Backlog of Orders Index declined 8 percentage points from 53.5 percent in June to 45.5 percent in July.

ISM's New Export Orders Index registered 52.2 percent, down 2.3 percentage points from June's 54.5 percent. The rate of growth in imports slowed somewhat, as the Imports Index declined from 55.1 percent in June to 54.2 percent in July.

"The growth in manufacturing activity decelerated during July," added Ore. "Steel price increases are drawing a lot of attention from supply managers and, while energy prices have moderated, they are still a concern. Textiles, Primary Metals, Furniture, and Transportation & Equipment report a strong upswing in hiring during July."

Of the 20 industries in the manufacturing sector, 12 industries reported growth: Apparel; Textiles; Tobacco; Rubber & Plastic Products; Transportation & Equipment; Chemicals; Food; Primary Metals; Printing & Publishing; Instruments & Photographic Equipment; Wood & Wood Products; and Furniture.

"Steel, Steel – Coated, Steel – Cold Rolled, Steel – Flat Rolled, and Steel – Galvanized are the commodities reported in short supply. Commodities reported up in price are: Aluminum, Caustic Soda, Chemicals, Chlorine, Copper, Corn, Corrugated Containers, Flour, Plastics, Polyethylene, Polyethylene – High Density, Polypropylene, Resins, Soybeans, Steel, Steel – Coated, Steel – Flat Rolled, Steel – Galvanized, Steel – Hot Rolled, Steel – Stainless, Steel Products, and Wheat. The only commodity reported down in price is Natural Gas," Ore stated.

JULY 2002 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
July vs June
Rate of Change
July vs June
PMI 50.5 Growing Slower
New Orders 50.4 Growing Slower
Production 55.7 Growing Slower
Employment 45.0 Contracting Faster
Supplier Deliveries 54.9 Slowing Slower
Inventories 41.8 Contracting Faster
Customers' Inventories 42.5 Too Low Faster
Prices 68.3 Increasing Faster
Backlog of Orders 45.5 Contracting From Growing
New Export Orders 52.2 Growing Slower
Imports 54.2 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 sixth consecutive month during July with an index of 50.5 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 July PMI indicates that both the overall economy and the manufacturing sector are growing. Ore added, "The past relationship between the PMI and the overall economy indicates that the average PMI for the months of January through July (53.8 percent) corresponds to 4 percent growth in real gross domestic product (GDP). However, if the PMI for July (50.5 percent) turned out to be the annual average for 2002, it would correspond to a 2.8 percent increase in GDP."

Month Jul'02 Jun'02 May'02 Apr'02 Mar'02
PMI% 50.5 56.2 55.7 53.9 55.6
Month Feb'02 Jan'02 Dec'01 Nov'01 Oct'01
PMI% 54.7 49.9 48.1 44.7 39.5
Month Sep'01 Aug'01 Jul'01 Jun'01 May'01
PMI% 46.2 47.9 43.9 44.3 42.3

New Orders

ISM's New Orders Index indicated growth in July for the eighth consecutive month. The index is 50.4 percent, 10.4 percentage points lower than the 60.8 percent registered in June. 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 July are: Apparel; Textiles; Chemicals; Rubber & Plastic Products; Transportation & Equipment; Food; Wood & Wood Products; Printing & Publishing; and Glass, Stone & Aggregate.

New Orders %Better %Same %Worse Net Index
July 2002 26 49 25 +1 50.4
June 2002 38 50 12 +26 60.8
May 2002 43 45 12 +31 63.1
April 2002 44 43 13 +31 59.0

Production

ISM's Production Index is 55.7 percent in July, 5.7 percentage points lower than the 61.4 percent reported in June. This is the eighth 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 in July, the following registered growth: Apparel; Tobacco; Textiles; Rubber & Plastic Products; Furniture; Printing & Publishing; Food; Instruments & Photographic Equipment; Transportation & Equipment; Chemicals; Wood & Wood Products; Glass, Stone & Aggregate; and Electronic Components & Equipment.

Production %Better %Same %Worse Net Index
July 2002 24 58 18 +6 55.7
June 2002 34 56 10 +24 61.4
May 2002 35 53 12 +23 58.5
April 2002 38 49 13 +25 58.0

Employment

ISM's Manufacturing Employment Index remained below 50 percent in July for the 22nd consecutive month. The Index registered 45 percent in July compared to 49.7 percent in June, a decrease of 4.7 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. Industries reporting growth in employment are: Textiles; Primary Metals; Furniture; and Transportation & Equipment.

Employment %Higher %Same %Lower Net Index
July 2002 9 73 18 -9 45.0
June 2002 18 67 15 +3 49.7
May 2002 18 65 17 +1 47.3
April 2002 16 64 20 -4 46.7

Supplier Deliveries

ISM's Supplier Deliveries Index indicates delivery performance is slower in July compared to June (a reading above 50 percent indicates slower deliveries). At 54.9 percent, the Index is 0.3 percentage point lower than June's 55.2 percent. The industries reporting slower supplier deliveries in July are: Fabricated Metals; Textiles; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Primary Metals; Transportation & Equipment; Paper; Electronic Components & Equipment; Chemicals; Furniture; Printing & Publishing; and Industrial & Commercial Equipment & Computers.

Supplier
Deliveries
%Slower %Same %Faster Net Index
July 2002 15 82 3 +12 54.9
June 2002 14 82 4 +10 55.2
May 2002 13 82 5 +8 53.9
April 2002 10 87 3 +7 53.7

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

Inventories

The rate of liquidation of manufacturers' inventories accelerated in July as the Inventories Index registered 41.8 percent compared to the 43.7 percent reported in June. The Inventories Index has been under 50 percent for 30 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 (in constant 1987 dollars). Two industries reported higher inventories in July are: Glass, Stone & Aggregate and Food.

Inventories %Higher %Same %Lower Net Index
July 2002 12 57 31 -19 41.8
June 2002 14 59 27 -13 43.7
May 2002 14 61 25 -11 45.6
April 2002 13 61 26 -13 42.9

Customers' Inventories

The Customers' Inventories Index is at 42.5 percent, down from 44.5 percent reported in June. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 14th consecutive month that the index has registered below 50. Industries reporting excessive customers' inventories in July are: Instruments & Photographic Equipment; Furniture; Printing & Publishing; and Glass, Stone & Aggregate.

Customers'
Inventories
% Reporting % Too High % About right % Too Low Net Index
July 2002 87 9 67 24 -15 42.5
June 2002 85 10 69 21 -11 44.5
May 2002 85 4 70 26 -22 39.0
April 2002 86 8 65 27 -19 40.5

Prices

ISM's Prices Index indicates manufacturers paid higher prices in July. This is the fifth month the Index has registered higher prices. With the Index at 68.3 percent, it is 2.8 percentage points higher than June's 65.5 percent. In July, 41 percent of supply executives reported paying higher prices and 6 percent reported paying lower prices, while 53 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. The industries reporting paying higher prices for July are: Primary Metals; Textiles; Glass, Stone & Aggregate; Rubber & Plastic Products; Food; Fabricated Metals; Paper; Furniture; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Industrial & Commercial Equipment & Computers; Wood & Wood Products; Transportation & Equipment; Instruments & Photographic Equipment; Printing & Publishing; and Chemicals.

Prices %Higher %Same %Lower Net Index
July 2002 41 53 6 +35 68.3
June 2002 40 53 7 +33 65.5
May 2002 38 54 8 +30 63.0
April 2002 36 53 11 +25 60.3

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 45.5 percent, indicating a slower rate of growth in manufacturers' backlogs as the Index declined 8 percentage points from June's report of 53.5 percent. Of the 88 percent of respondents who report their backlog of orders, 14 percent reported greater backlogs, 23 percent reported smaller backlogs, and 63 percent reported no change from June. The industries reporting an increase in order backlog during the month are: Printing & Publishing; Textiles; Wood & Wood Products; and Chemicals.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
July 2002 88 14 63 23 -9 45.5
June 2002 89 26 55 19 +7 53.5
May 2002 89 29 55 16 +13 56.5
April 2002 87 27 58 15 +12 56.0

New Export Orders

ISM's New Export Orders Index for July registered 52.2 percent, a decrease of 2.3 percentage points when compared to June's index of 54.5 percent. This is the seventh consecutive month the Index has indicated growth. The industries reporting growth in new export orders in July are: Wood & Wood Products; Textiles; Paper; Fabricated Metals; Food; Printing & Publishing; and Transportation & Equipment.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
July 2002 75 13 79 8 +5 52.2
June 2002 77 19 74 7 +12 54.5
May 2002 76 15 77 8 +7 53.3
April 2002 77 15 76 9 +6 51.9

Imports

Imports of materials by manufacturers continued to grow in July as the Imports Index registered 54.2 percent. The July Index indicates a slower rate of growth as evidenced by the 0.9 percentage point decrease compared to June's Index of 55.1 percent. The nine industries reporting growth in import activity for July are: Furniture; Wood & Wood Products; Glass, Stone & Aggregate; Fabricated Metals; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Chemicals; Electronic Components & Equipment; and Transportation & Equipment.

Imports %Reporting %Higher %Same %Lower Net Index
July 2002 74 14 78 8 +6 54.2
June 2002 74 16 79 5 +11 55.1
May 2002 77 18 75 7 +11 53.6
April 2002 76 19 75 6 +13 55.7

Buying Policy

Average commitment leadtime for Capital Expenditures rose 3 days to 95 days. Average leadtime for Production Materials declined 2 days to 46 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies declined 3 days to 21 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
July 2002 24 7 17 24 23 5 95
June 2002 24 7 18 24 23 4 92
May 2002 26 4 17 26 22 5 94
April 2002 23 12 14 25 21 5 91
Production Materials              
July 2002 21 46 18 9 5 1 46
June 2002 21 46 17 10 4 2 48
May 2002 21 45 18 10 4 2 49
April 2002 18 46 19 11 4 2 50
MRO Supplies              
July 2002 55 33 8 4 0 0 21
June 2002 52 36 9 2 0 1 24
May 2002 55 36 7 1 1 0 20
April 2002 56 34 8 2 0 0 20

In Short Supply

Steel — 5th month; Steel, Coated — 2nd month; Steel, Cold Rolled; Steel, Flat Rolled — 2nd month; and Steel, Galvanized are the commodities reported in short supply.

Up in Price

Aluminum — 6th month; Caustic Soda — 2nd month; Chemicals; Chlorine; Copper — 2nd month; Corn; Corrugated — 2nd month; Flour; Plastics; Polyethylene — 4th month; Polyethylene, High Density — 4th month; Polypropylene — 2nd month; Resins; Soybeans; Steel — 6th month; Steel, Coated — 2nd month; Steel, Flat Rolled — 2nd month; Steel, Galvanized; Steel, Hot Rolled — 2nd month; Steel, Stainless; Steel Products; and Wheat.

Down in Price

Natural Gas is the only commodity reported down in price.

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 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. 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 August 2002 data will be released at 10:00 a.m. (ET) on September 3, 2002.



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