July 2004 Manufacturing ISM Report On Business®

FOR RELEASE: August 2, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
PMI at 62.0%

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 2004.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in July for the 14th consecutive month, while the overall economy grew for the 33rd 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 continues to grow at a rapid rate as the PMI has now been above 60 percent for nine consecutive months. This is the longest period of growth above 60 percent since the 12-month period of July 1972 through June 1973, when the index was over 60 percent each month and reached a high of 72.1 percent in January 1973. The growth of New Orders and Production accelerated during the month, adding strength to the index. Employment grew at a slower rate, while the Inventories Index declined."

The ISM Prices Index continues to moderate, but the prices manufacturers pay are still an issue. ISM's Customers' Inventories Index indicates that customer inventories are too low at this time. The Backlog of Orders Index indicates that order backlogs increased in July. The New Export Orders and Import Indexes continued to grow in July.

Comments from respondents indicate that many consider their business to be "strong" with a number indicating significant year-over-year improvement. Others continue to indicate only minor improvement. Energy prices remain a major concern for purchasers, as prices are at or near record highs. It appears that the steel supply situation has improved as there are fewer mentions of shortages.

ISM's PMI registered 62 percent in July, an increase of 0.9 percentage point when compared to 61.1 percent in June. ISM's New Orders Index gained 4.7 percentage points from 60 percent in June to 64.7 percent in July. ISM's Production Index increased 2.9 percentage points from 63.2 percent in June to 66.1 percent in July. The ISM Employment Index is at 57.3 percent for July, a decrease of 2.4 percentage points when compared to the 59.7 percent reported in June.

ISM's Supplier Deliveries Index registered 64.2 percent, 3.9 percentage points lower than June's 68.1 percent. ISM's Inventories Index registered 49.9 percent in July, down from the 51.1 percent reported in June. ISM's Customers' Inventories Index for July is at 37.5 percent, a decrease of 1.5 percentage points compared to the June reading of 39 percent. ISM's Prices Index in July is 77 percent, 4 percentage points lower than the 81 percent reported in June.

ISM's Backlog of Orders Index decreased 0.5 percentage point, registering 58 percent in July compared to 58.5 percent in June. ISM's New Export Orders Index registered 56.2 percent, a decrease of 0.5 percentage point from June's 56.7 percent. ISM's Imports Index increased 2.3 percentage points to 59.9 percent in July, up from 57.6 percent in June.

"July represents a good start for the third quarter, and the outlook continues to be very encouraging as New Orders and Production accelerated during the month," said Ore.

In July, 18 industries reported growth: Instruments & Photographic Equipment; Furniture; Paper; Miscellaneous*; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Tobacco; Rubber & Plastic Products; Fabricated Metals; Food; Electronic Components & Equipment; Leather; Chemicals; Transportation & Equipment; Primary Metals; Printing & Publishing; Glass, Stone & Aggregate; and Textiles.

"Adhesives; Aluminum; Aluminum Castings; Carbon Steel; Cardboard; Caustic Soda; Chemicals; Coal; Corrugated Cartons; Diesel Fuel; Electronic Components; Energy; Freight; Fuel Oil; Gasoline; HDPE Products; Hardwood Lumber; LDPE Products; Linerboard; Machine Parts; Natural Gas; Oil Products; Packaging; Paper; Particle Board; Plastic Products; Polymers; Stainless Steel Products; Steel; Steel Scrap; Transportation; and Wire are the commodities listed as up in price. The commodities listed in short supply are DRAMs; Electronic Components; Paper; Stainless Steel; Steel; and Steel Products (various forms). The commodities reported down in price are Fuel Oil; Gasoline; and Natural Gas," Ore stated.

JULY 2004 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
July vs June
Rate of Change
July vs June
PMI 62.0 Growing Faster
New Orders 64.7 Growing Faster
Production 66.1 Growing Faster
Employment 57.3 Growing Slower
Supplier Deliveries 64.2 Slowing Slower
Inventories 49.9 Contracting From Growing
Customers' Inventories 37.5 Too Low Faster
Prices 77.0 Increasing Slower
Backlog of Orders 58.0 Growing Slower
New Export Orders 56.2 Growing Slower
Imports 59.9 Growing Faster

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

PMI

The PMI indicates that the manufacturing economy grew in July for the 14th consecutive month. The PMI for July registered 62 percent, an increase of 0.9 percentage point compared to the June reading of 61.1 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 July 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 July (62.3 percent) corresponds to a 7.1 percent increase in real gross domestic product (GDP). In addition, if the PMI for July (62 percent) is annualized, this corresponds to a 7 percent increase in GDP.

Month Jul'04 Jun'04 May'04 Apr'04 Mar'04
PMI% 62.0 61.1 62.8 62.4 62.5
Month Feb'04 Jan'04 Dec'03 Nov'03 Oct'03
PMI% 61.4 63.6 63.4 61.3 57.1
Month Sep'03 Aug'03 Jul'03 Jun'03 May'03
PMI% 54.7 55.0 52.6 50.4 50.0

New Orders

ISM's New Orders Index grew in July with a reading of 64.7 percent. The index is 4.7 percentage points higher than the 60 percent registered in June, and it is the 15th 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). Sixteen industries report increases for the month of July: Furniture; Instruments & Photographic Equipment; Paper; Wood & Wood Products; Miscellaneous*; Food; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Primary Metals; Chemicals; Fabricated Metals; Electronic Components & Equipment; Transportation & Equipment; Textiles; Printing & Publishing; and Glass, Stone & Aggregate.

New Orders %Better %Same %Worse Net Index
July 2004 36 51 13 +23 64.7
June 2004 38 49 13 +25 60.0
May 2004 48 38 14 +34 62.8
April 2004 51 42 7 +44 65.0

Production

ISM's Production Index is 66.1 percent in July, 2.9 percentage points higher than the 63.2 percent reported in June, reflecting the 15th 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 July, 16 registered growth: Tobacco; Leather; Paper; Instruments & Photographic Equipment; Miscellaneous*; Industrial & Commercial Equipment & Computers; Furniture; Chemicals; Food; Wood & Wood Products; Fabricated Metals; Rubber & Plastic Products; Transportation & Equipment; Primary Metals; Electronic Components & Equipment; and Glass, Stone & Aggregate.

Production %Better %Same %Worse Net Index
July 2004 34 55 11 +23 66.1
June 2004 40 49 11 +29 63.2
May 2004 46 43 11 +35 64.8
April 2004 48 45 7 +41 67.0

Employment

ISM's Employment Index grew for the ninth consecutive month, following a 37-month trend of contraction. The index registered 57.3 percent in July compared to 59.7 percent in June, a decrease of 2.4 percentage points. 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 14 industries reporting growth in employment during July are: Instruments & Photographic Equipment; Wood & Wood Products; Electronic Components & Equipment; Furniture; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Printing & Publishing; Miscellaneous*; Textiles; Glass, Stone & Aggregate; Paper; Food; Transportation & Equipment; and Chemicals.

Employment %Higher %Same %Lower Net Index
July 2004 25 65 10 +15 57.3
June 2004 35 56 9 +26 59.7
May 2004 36 57 7 +29 61.9
April 2004 30 58 12 +18 57.8

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 31st consecutive month in July. ISM's Supplier Deliveries Index for July registered 64.2 percent, a decrease of 3.9 percentage points compared to June's reading of 68.1 percent. A reading above 50 percent indicates slower deliveries. The 17 industries reporting slower supplier deliveries in July are: Apparel; Fabricated Metals; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Paper; Rubber & Plastic Products; Chemicals; Wood & Wood Products; Primary Metals; Textiles; Miscellaneous*; Printing & Publishing; Furniture; Glass, Stone & Aggregate; and Food.

Supplier
Deliveries
%Slower %Same %Faster Net Index
July 2004 35 61 4 +31 64.2
June 2004 39 58 3 +36 68.1
May 2004 41 57 2 +39 69.4
April 2004 38 58 4 +34 67.1

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

Inventories

Manufacturers' inventories reversed direction and declined slightly in July as ISM's Inventories Index registered 49.9 percent, a decrease of 1.2 percentage points when compared to June's 51.1 percent. Prior to June's reading that indicated growth, the Inventories Index had been below 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 eight industries reporting higher inventories in July are: Furniture; Instruments & Photographic Equipment; Fabricated Metals; Wood & Wood Products; Rubber & Plastic Products; Printing & Publishing; Industrial & Commercial Equipment & Computers; and Food.

Inventories %Higher %Same %Lower Net Index
July 2004 17 63 20 -3 49.9
June 2004 20 62 18 +2 51.1
May 2004 19 61 20 -1 49.3
April 2004 15 61 24 -9 44.8

Customers' Inventories**

The July Customers' Inventories Index is at 37.5 percent, a decrease of 1.5 percentage points compared to the June reading of 39 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 38th consecutive month that the index has registered below 50 percent. Miscellaneous* is the only industry reporting higher customer inventories during July.

Customers'
Inventories
%Reporting % Too High % About Right % Too Low Net Index
July 2004 76 6 63 31 -25 37.5
June 2004 72 8 62 30 -22 39.0
May 2004 70 6 62 32 -26 37.0
April 2004 73 11 59 30 -19 40.5

Prices**

ISM's Prices Index indicates manufacturers continued to pay higher prices in July. This is the 29th consecutive month the index has registered higher prices. July's index is at 77 percent, 4 percentage points lower than June's reading of 81 percent. During July, 58 percent of supply executives reported paying higher prices and 4 percent reported paying lower prices, while 38 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. Nineteen industries reported paying higher prices in July: Tobacco; Petroleum; Leather; Primary Metals; Printing & Publishing; Instruments & Photographic Equipment; Rubber & Plastic Products; Furniture; Wood & Wood Products; Paper; Fabricated Metals; Chemicals; Textiles; Miscellaneous*; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; Food; Transportation & Equipment; and Glass, Stone & Aggregate.

Prices %Higher %Same %Lower Net Index
July 2004 58 38 4 +54 77.0
June 2004 66 30 4 +62 81.0
May 2004 74 24 2 +72 86.0
April 2004 77 22 1 +76 88.0

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 58 percent, indicating manufacturers' backlogs in July grew at a slightly slower rate when compared to June. Of the 87 percent of respondents who report their backlog of orders, 32 percent reported greater backlogs, 16 percent reported smaller backlogs, and 52 percent reported no change from June. The 15 industries reporting an increase in order backlogs during the month are: Miscellaneous*; Wood & Wood Products; Rubber & Plastic Products; Paper; Fabricated Metals; Instruments & Photographic Equipment; Chemicals; Industrial & Commercial Equipment & Computers; Glass, Stone & Aggregate; Primary Metals; Electronic Components & Equipment; Food; Transportation & Equipment; Furniture; and Printing & Publishing.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
July 2004 87 32 52 16 +16 58.0
June 2004 88 31 55 14 +17 58.5
May 2004 87 42 42 16 +26 63.0
April 2004 88 43 47 10 +33 66.5

New Export Orders

ISM's New Export Orders Index for July registered 56.2 percent, a decrease of 0.5 percentage point when compared to June's index of 56.7 percent. This is the 20th consecutive month of growth in export orders. The 13 industries reporting growth in new export orders in July are: Instruments & Photographic Equipment; Textiles; Furniture; Printing & Publishing; Chemicals; Rubber & Plastic Products; Primary Metals; Fabricated Metals; Electronic Components & Equipment; Food; Paper; Transportation & Equipment; and Industrial & Commercial Equipment & Computers.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
July 2004 77 19 75 6 +13 56.2
June 2004 77 24 70 6 +18 56.7
May 2004 77 25 71 4 +21 60.6
April 2004 78 27 69 4 +23 61.0

Imports

Imports of materials by manufacturers grew during July as the Imports Index registered 59.9 percent. The index rose 2.3 percentage points when compared to June's index of 57.6 percent, indicating a slower rate of growth. The 13 industries reporting growth in import activity for July are: Transportation & Equipment; Furniture; Fabricated Metals; Printing & Publishing; Miscellaneous*; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Rubber & Plastic Products; Wood & Wood Products; Chemicals; Primary Metals; Food; and Instruments & Photographic Equipment.

Imports %Reporting %Higher %Same %Lower Net Index
July 2004 79 23 72 5 +18 59.9
June 2004 78 22 74 4 +18 57.6
May 2004 77 24 72 4 +20 59.8
April 2004 78 24 72 4 +20 58.5

*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 remained unchanged at 105 days. Average leadtime for Production Materials increased 1 day to 45 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies is unchanged at 22 days.

  Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
July 2004 24 8 14 21 25 8 105
June 2004 23 9 16 20 23 9 105
May 2004 25 9 15 19 22 10 106
April 2004 27 9 11 21 24 8 102
Production Materials              
July 2004 20 45 21 10 3 1 45
June 2004 25 40 20 11 3 1 44
May 2004 21 44 21 11 2 1 44
April 2004 22 39 21 13 3 2 50
MRO Supplies              
July 2004 53 36 8 2 1 0 22
June 2004 51 38 9 1 1 0 22
May 2004 55 35 7 2 1 0 21
April 2004 54 35 8 2 1 0 22

In Short Supply

DRAMs; Electronic Components — 7th month; Paper; Stainless Steel — 7th month; Steel — 7th month; and Steel Products (various forms).

Up in Price

Adhesives — 2nd month; Aluminum — 9th month; Aluminum Castings; Carbon Steel; Cardboard; Caustic Soda — 3rd month; Chemicals — 6th month; Coal — 3rd month; Corrugated Cartons — 6th month; Diesel Fuel — 5th month; Electronic Components — 3rd month; Energy — 7th month; Freight — 5th month; Fuel Oil — 7th month; Gasoline — 7th month; HDPE Products — 5th month; Hardwood Lumber — 3rd month; LDPE Products — 2nd month; Linerboard — 2nd month; Machine Parts; Natural Gas — 24th month; Oil Products; Packaging — 2nd month; Paper — 5th month; Particle Board — 6th month; Plastic Products — 6th month; Polymers; Stainless Steel Products; Steel — 10th month; Steel Scrap; Transportation; and Wire.

Down in Price

Fuel Oil; Gasoline; and Natural Gas.

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 August 2004 data will be released at 10:00 a.m. (ET) on September 1, 2004.



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