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August 2001 Manufacturing Report On Business®

FOR RELEASE: September 4, 2001

Contact: Kristen Kioa
  NAPM Media Relations
  480/752-6276 ext. 3015

MANUFACTURING CONTINUES TO SLOW IN AUGUST 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 August 2001.

PMI at 47.9%
Production, New Orders Growing
Prices, Inventories, Employment Declining

(Tempe, Arizona) — Economic activity in the manufacturing sector declined for the 13th consecutive month in August while the overall economy grew for the third consecutive 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 August as has been the trend since August 2000. However, the rate of decline decelerated significantly during the month. Both production and new orders made marked improvement and recorded impressive growth after a lengthy period of decline providing encouragement that a number of industries are starting to recover."

NAPM's Backlog of Orders Index indicates that order backlogs declined for the 16th consecutive month. NAPM's Supplier Deliveries Index continues to reflect faster deliveries. Manufacturing employment continued to decline in August as the index fell below the breakeven point (an index of 50 percent) for the 11th consecutive month. NAPM's Prices Index remained below 50 percent as manufacturers experienced lower prices for the sixth consecutive month. New Export Orders grew in August after four consecutive months of decline. August's Imports Index decelerated significantly but still failed to grow for the eighth consecutive month. Comments from purchasing and supply managers this month reflect continuing concerns about overall business conditions. In line with the improvement in new orders and production, a number of members indicated that things are starting to improve in their markets.

NAPM's PMI is 47.9 percent in August, an increase of 4.3 percentage points from the 43.6 percent reported in July. NAPM's Production Index rose 5.8 percentage points from 46.4 percent in July to 52.2 percent in August. NAPM's New Orders Index rose 6.8 percentage points from 46.3 percent in July to 53.1 percent in August. NAPM's Backlog of Orders Index rose from 42.5 percent in July to 44.5 percent in August, but continues to indicate smaller backlogs. NAPM's Supplier Deliveries Index declined to 46.5 percent in August, indicating faster deliveries during the month. The NAPM Employment Index is at 40.8 percent for August, an increase of 3.6 percentage points when compared to the 37.2 percent reported in July. NAPM's Prices Index in August is 33.9 percent, a decrease of 4.8 percentage points from July's 38.7 percent.

NAPM's Inventories Index is at 37.7 percent indicating a slightly slower rate of inventory liquidation when compared to July's 35.8 percent. Responding to a special monthly question concerning customers' inventories of products purchased from the their organizations, 13 percent of the purchasing and supply executives felt they were too high (up from 9 percent in July), while 16 percent felt they were too low (down from 19 percent in July) and 71 percent thought they were about right (down from 72 percent in July). NAPM's New Export Orders Index registered 51.9 percent, up from July's 48.2 percent. Imports of materials by manufacturers continued to decline as NAPM's Imports Index fell just below 50 percent at 49.7 percent for the month and up from July's 47.3 percent.

"The overall picture is one of continued decline in manufacturing activity during the month of August," added Ore. "The manufacturing sector is in its 13th month of decline but appears to show signs of an upward movement as the PMI made its most significant gain since June 1996. It is particularly encouraging that 12 of 20 industries reported growth in new orders."

Of the 20 industries in the manufacturing sector, seven reported growth: Leather; Food; Printing & Publishing; Glass, Stone & Aggregate; Furniture; Paper; and Fabricated Metals.

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

AUGUST 2001 NAPM BUSINESS SURVEY AT A GLANCE
Series August
Index
Direction
Aug vs Jul
Rate of Change
Aug vs Jul
PMI 47.9 Contracting Slower
Production 52.2 Growing From Contracting
New Orders 53.1 Growing From Contracting
Backlog of Orders 44.5 Contracting Slower
Supplier Deliveries 46.5 Faster Faster
Inventories 37.7 Contracting Slower
Employment 40.8 Contracting Slower
Prices 33.9 Contracting Faster
New Export Orders 51.9 Growing From Contracting
Imports 49.7 Contracting Slower

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

PMI

The PMI indicates that the manufacturing economy failed to grow during the month of August with an index of 47.9 percent. This is a slower rate of decline when compared to July's PMI of 43.6 percent and the 13th 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 August 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 economy indicates that the average PMI for the months of January through August (43.5 percent) corresponds to 0.3 percent growth in real gross domestic product (GDP). However, if the PMI for August (47.9 percent) turned out to be the annual average for 2001, this would correspond to a 1.9 percent increase in GDP."

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

Production

NAPM's Production Index rose to 52.2 percent in August up from 46.4 percent in July. This is the first month that the index has risen above 50 percent after eight months of decline. An index above 49.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the 20 industries reporting, those registering growth in August were: Leather; Food; Printing & Publishing; Paper; Fabricated Metals; Furniture; and Chemicals.

Production %Better %Same %Worse Net Index
August 2001 22 55 23 -1 52.2
July 2001 19 50 31 -12 46.4
June 2001 18 56 26 -8 46.2
May 2001 19 52 29 -10 42.7

New Orders

NAPM's New Orders Index rose above 50 percent after registering 13 consecutive months without growth. The index is at 53.1 percent representing an increase of 6.8 percentage points when compared to July's 46.3 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 August, 12 industries reported higher rates of increase in new orders. They were (listed in order): Leather; Glass, Stone, & Aggregate; Printing & Publishing; Lumber; Food; Rubber & Plastic Products; Fabricated Metals; Furniture; Paper; Miscellaneous (a preponderance of jewelry, toys, sporting goods, and musical instruments); Chemicals; and Transportation & Equipment.

New Orders %Better %Same %Worse Net Index
August 2001 27 51 22 +5 53.1
July 2001 23 49 28 -5 46.3
June 2001 25 49 26 -1 48.6
May 2001 25 45 30 -5 45.5

Backlog of Orders

The Backlog of Orders Index failed to grow for the 16th consecutive month in August. NAPM's Backlog of Orders Index (not seasonally adjusted) registered 44.5 percent indicating a slower rate of decline in manufacturers' backlogs than reported in July. Of the 90 percent of respondents who measure their backlog of orders, 16 percent reported greater backlogs, 27 percent reported smaller backlogs, and 57 percent reported no change from July. Glass, Stone & Aggregate; Printing & Publishing; and Fabricated Metals were the industries reporting an increased backlog of orders during the month.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
August 2001 90 16 57 27 -11 44.5
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

Supplier Deliveries

NAPM's Supplier Deliveries Index in August indicates delivery performance is faster (a reading below 50 percent indicates faster deliveries). At 46.5 percent, the index is 0.9 percentage point lower than July's 47.4 percent. The industries reporting slower supplier deliveries in August were: Furniture; Paper; Food; and Fabricated Metals.

Supplier
Deliveries
%Slower %Same %Faster Net Index
August 2001 6 83 11 -5 46.5
July 2001 5 86 9 -4 47.4
June 2001 5 85 10 -5 48.0
May 2001 6 80 14 -8 45.7

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

Inventories

The rate of liquidation of manufacturers' inventories was still quite strong in August as the Inventories Index registered 37.7 percent, up from the 35.8 percent reported in July. The Inventories Index has been under 50 percent for 19 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 industries reporting higher inventories were Leather and Food.

Inventories %Higher %Same %Lower Net Index
August 2001 12 54 34 -22 37.7
July 2001 9 53 38 -29 35.8
June 2001 14 52 34 -20 40.8
May 2001 13 51 36 -23 38.7

Employment

NAPM's Manufacturing Employment Index fell below 50 percent in August for the 11th consecutive month. The index registered 40.8 percent in August compared to 37.2 percent in July, an increase of 3.6 percentage points.

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. There were no reports of higher employment in any of the sectors during the month.

Employment %Higher %Same %Lower Net Index
August 2001 8 65 27 -19 40.8
July 2001 8 59 33 -25 37.2
June 2001 10 56 34 -24 36.3
May 2001 11 53 36 -25 35.0

Prices

NAPM's Prices Index indicates manufacturers paid lower prices in August. With the index at 33.9 percent, this marks the sixth consecutive month the index has been below 50 percent. The index is 4.8 percentage points lower than July's 38.7 percent. In August, 6 percent of purchasing and supply executives reported paying higher prices and 34 percent reported paying lower prices, while 60 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. Leather and Food were the only industries reporting paying higher prices.

Prices %Higher %Same %Lower Net Index
August 2001 6 60 34 -28 33.9
July 2001 7 65 28 -21 38.7
June 2001 13 61 26 -13 42.3
May 2001 14 65 21 -7 45.2

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 August registered 51.9 percent, 3.7 percentage points higher than July's index of 48.2 percent. This is the first month that the Index has been above 50 percent after four consecutive months under 50 percent. Industries reporting growth in new export orders in August were: Food; Printing & Publishing; Lumber; Furniture; Miscellaneous (a preponderance of jewelry, toys, sporting goods, and musical instruments); Instruments & Photographic Equipment; Transportation & Equipment; and Chemicals.

New Export
Orders
%Exporting %Better %Same %Worse Net Index
August 2001 76 14 77 9 +5 51.9
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

Imports

Imports of materials by manufacturers continued to decline in August, though at a very slow rate, as the Imports Index registered 49.7 percent, a 2.4 percentage point increase when compared to July's report of 47.3 percent. The six industries reporting growth in import activity for August were: Furniture; Printing & Publishing; Fabricated Metals; Instruments & Photographic Equipment; Food; and Chemicals.

Imports %Importing %Higher %Same %Lower Net Index
August 2001 76 10 81 9 +1 49.7
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

Buying Policy

Average commitment leadtime for Capital Expenditures rose 9 days to 98 days. Average leadtime for Production Materials rose 2 days to 47 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies rose 2 days to 22 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
August 2001 28 8 14 19 24 7 98
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
Production Materials              
August 2001 23 41 22 9 3 2 47
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
MRO Supplies              
August 2001 53 34 10 3 0 0 22
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

In Short Supply

Caustic Soda — 12th month.

Up in Price

Electricity.

Down in Price

Aluminum — 6th month; Butadiene; Caustic Soda — 4th month; Copper — 3rd month; Corrugated Containers — 7th month; Diesel — 2nd month; Ethylene; Fuel — 2nd month; Linerboard; Methanol — 2nd month; Natural Gas — 7th month; Paper — 5th month; Plastic; Plastic Resins — 2nd month; High Density Polyethylene — 3rd month; Polyethylene — 2nd month; Polypropylene — 3rd month; Resins — 3rd month; Solvents; Stainless Steel; Steel — 4th month; Styrene; Wood Pulp — 4th month; and Zinc — 2nd month.

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. In May 2001 the membership of the National Association of Purchasing Management voted to change the association's name to the Institute for Supply Management™. The association, established in 1915, is the world's leading educator of supply management professionals and is a valuable resource for decision makers in major markets, organizations, and government. This change reflects recognition of the increasing strategic and global significance of supply management, and becomes effective January 1, 2002. For further information, see NAPM's Web site at www.ism.ws.

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 September 2001 data will be released at 10:00 a.m. (ET) on October 1, 2001.


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