August 2002 Manufacturing ISM Report On Business®

FOR RELEASE: September 3, 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 August 2002.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew for the seventh consecutive month in August. The overall economy grew for the 10th 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. "Putting the year in perspective, we now have seven consecutive months of modest growth. August's PMI, at 50.5 percent, indicates that manufacturing improved when compared to July. New Orders softened, and are a cause for concern as we look at the balance of the year. At the current level of growth in the overall economy, many manufacturers find themselves anxious about second-half sales."

ISM's Backlog of Orders Index indicates that order backlogs declined for the second consecutive month. ISM's Supplier Deliveries Index reflects slower deliveries for the eighth consecutive month. Manufacturing employment continued to decline in August as the index remained below the breakeven point (an index of 50 percent) for the 23rd consecutive month. ISM's Prices Index is above 50 percent as manufacturers experienced higher prices for the sixth consecutive month. New Export Orders grew in August for the eighth consecutive month. August's Imports Index decelerated, while still registering growth for the ninth consecutive month.

Comments from purchasing and supply executives reflect soft demand and very competitive markets. While some indicate that business is improving, they lack confidence when forecasting the months ahead. Declines in consumer and business confidence are major themes.

ISM's PMI is 50.5 percent in August, the same as reported in July. ISM's New Orders Index declined from 50.4 percent in July to 49.7 percent in August. ISM's Production Index declined 0.1 percentage point from 55.7 percent in July to 55.6 percent in August. The ISM Employment Index is at 45.8 percent for August, an increase of 0.8 percentage point when compared to the 45 percent reported in July.

ISM's Supplier Deliveries Index registered 53.4 percent, compared to 54.9 percent in July. ISM's Inventories Index rose to 45.2 percent. ISM's Customers' Inventories Index for August is at 42.5 percent, the same as reported in July. ISM's Prices Index in August is 61.5 percent, a decrease of 6.8 percentage points from July's 68.3 percent. ISM's Backlog of Orders Index declined 0.5 percentage point from 45.5 percent in July to 45 percent in August.

ISM's New Export Orders Index registered 52.7 percent, up 0.5 percentage point from July's 52.5 percent. The rate of growth in imports decreased as the Imports Index declined from 54.2 percent in July to 51.9 percent in August.

"Manufacturing activity improved slightly during August," added Ore. "Steel price concerns are less than they were last month. The decline of the U.S. Dollar seems to have helped exports while slowing imports."

Of the 20 industries in the manufacturing sector, eight industries reported growth: Printing & Publishing; Leather; Transportation & Equipment; Apparel; Chemicals; Food; Industrial & Commercial Equipment & Computers; and Paper.

"Steel and Steel — Coated are the commodities reported in short supply. Commodities reported up in price are: Caustic Soda, Chemicals, Corrugated Containers, Flour, Methanol, Natural Gas, Fuel Oil, Phenol, Plastics, Polyethylene — High Density, Resins, Soybean Oil, Steel, Steel — Coated, Steel — Galvanized, and Wheat. Aluminum, Corrugated Containers, and Natural Gas are the commodities reported down in price," Ore stated.

AUGUST 2002 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
Aug vs Jul
Rate of Change
Aug vs Jul
PMI 50.5 Growing Same
New Orders 49.7 Contracting From Growing
Production 55.6 Growing Slower
Employment 45.8 Contracting Slower
Supplier Deliveries 53.4 Slowing Slower
Inventories 45.2 Contracting Slower
Customers' Inventories 42.5 Too Low Same
Prices 61.5 Increasing Slower
Backlog of Orders 45.0 Contracting Faster
New Export Orders 52.7 Growing Faster
Imports 51.9 Growing Slower

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

PMI

The PMI indicates that the manufacturing economy grew for the seventh consecutive month during August 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 August 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 August (53.4 percent) corresponds to 3.9 percent growth in real gross domestic product (GDP). However, if the PMI for August (50.5 percent) turned out to be the annual average for 2002, it would correspond to a 2.8 percent increase in GDP."

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

New Orders

ISM's New Orders Index declined in August after eight consecutive months of growth. The index is 49.7 percent, 0.7 percentage point lower than the 50.4 percent registered in July. 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 August are: Printing & Publishing; Paper; Chemicals; Industrial & Commercial Equipment & Computers; Transportation & Equipment; and Furniture.

New Orders %Better %Same %Worse Net Index
August 2002 23 52 25 -2 49.7
July 2002 26 49 25 +1 50.4
June 2002 38 50 12 +26 60.8
May 2002 43 45 12 +31 63.1

Production

ISM's Production Index is 55.6 percent in August, 0.1 percentage point lower than the 55.7 percent reported in July. This is the ninth 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 August, the following registered growth: Chemicals; Printing & Publishing; Textiles; Transportation & Equipment; Furniture; Food; Paper; Fabricated Metals; and Industrial & Commercial Equipment & Computers.

Production %Better %Same %Worse Net Index
August 2002 24 57 19 +5 55.6
July 2002 24 58 18 +6 55.7
June 2002 34 56 10 +24 61.4
May 2002 35 53 12 +23 58.5

Employment

ISM's Manufacturing Employment Index remained below 50 percent in August for the 23rd consecutive month. The Index registered 45.8 percent in August compared to 45 percent in July, an increase of 0.8 percentage point. 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: Printing & Publishing; Furniture; and Transportation & Equipment.

Employment %Higher %Same %Lower Net Index
August 2002 10 71 19 -9 45.8
July 2002 9 73 18 -9 45.0
June 2002 18 67 15 +3 49.7
May 2002 18 65 17 +1 47.3

Supplier Deliveries

ISM's Supplier Deliveries Index indicates delivery performance is slower in August compared to July (a reading above 50 percent indicates slower deliveries). At 53.4 percent, the Index is 1.5 percentage points lower than July's 54.9 percent. The industries reporting slower supplier deliveries in August are: Apparel; Primary Metals; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Printing & Publishing; Textiles; Fabricated Metals; Food; Paper; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); and Electronic Components & Equipment.

Supplier
Deliveries
%Slower %Same %Faster Net Index
August 2002 13 83 4 +9 53.4
July 2002 15 82 3 +12 54.9
June 2002 14 82 4 +10 55.2
May 2002 13 82 5 +8 53.9

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

Inventories

The rate of liquidation of manufacturers' inventories decelerated in August as the Inventories Index registered 45.2 percent. This compares to 41.8 percent as reported in July. The Inventories Index has been under 50 percent for 31 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). The seven industries reporting higher inventories in August are: Leather; Food; Rubber & Plastic Products; Glass, Stone & Aggregate; Fabricated Metals; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); and Chemicals.

Inventories %Higher %Same %Lower Net Index
August 2002 18 58 24 -6 45.2
July 2002 12 57 31 -19 41.8
June 2002 14 59 27 -13 43.7
May 2002 14 61 25 -11 45.6

Customers' Inventories

The Customers' Inventories Index is at 42.5 percent, the same percentage reported in July. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 15th consecutive month that the Index has registered below 50. Food is the only industry reporting excessive customers' inventories in August.

Customers'
Inventories
%Reporting % Too High % About right % Too Low Net Index
August 2002 80 6 73 21 -15 42.5
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

Prices

ISM's Prices Index indicates manufacturers continued to pay higher prices in August. This is the sixth consecutive month the Index has registered higher prices. With the Index at 61.5 percent, it is 6.8 percentage points lower than July's 68.3 percent. In August, 34 percent of supply executives reported paying higher prices and 8 percent reported paying lower prices, while 58 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 August are: Leather; Glass, Stone & Aggregate; Food; Primary Metals; Wood & Wood Products; Paper; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Furniture; Printing & Publishing; Fabricated Metals; Chemicals; Rubber & Plastic Products; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; and Electronic Components & Equipment.

Prices %Higher %Same %Lower Net Index
August 2002 34 58 8 +26 61.5
July 2002 41 53 6 +35 68.3
June 2002 40 53 7 +33 65.5
May 2002 38 54 8 +30 63.0

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 (not seasonally adjusted) registered 45 percent, indicating a faster decline in manufacturers' backlogs as the Index declined 0.5 percentage point from July's report of 45.5 percent. Of the 86 percent of respondents who report their backlog of orders, 17 percent reported greater backlogs, 27 percent reported smaller backlogs, and 56 percent reported no change from July. The industries reporting an increase in order backlog during the month are: Glass, Stone & Aggregate; Food; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); and Printing & Publishing.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
August 2002 86 17 56 27 -10 45.0
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

New Export Orders

ISM's New Export Orders Index for August registered 52.7 percent, an increase of 0.5 percentage point when compared to July's index of 52.2 percent. This is the eighth consecutive month the Index has indicated growth. The industries reporting growth in new export orders in August are: Food; Printing & Publishing; Industrial & Commercial Equipment & Computers; Furniture; Paper; Fabricated Metals; Transportation & Equipment; Electronic Components & Equipment; and Textiles.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
August 2002 77 14 79 7 +7 52.7
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

Imports

Imports of materials by manufacturers continued to grow at a slower rate in August as the Imports Index registered 51.9 percent. The August Index indicates a slower rate of growth as evidenced by the 2.3 percentage points decrease when compared to July's Index of 54.2 percent. The nine industries reporting growth in import activity for August are: Wood & Wood Products; Apparel; Textiles; Industrial & Commercial Equipment & Computers; Furniture; Fabricated Metals; Food; Transportation & Equipment; and Printing & Publishing.

Imports %Reporting %Higher %Same %Lower Net Index
August 2002 74 14 78 8 +6 51.9
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

Buying Policy

Average commitment leadtime for Capital Expenditures rose 7 days to 102 days. Average leadtime for Production Materials rose 2 days to 48 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies remained at 21 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
August 2002 23 7 16 23 24 7 102
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
Production Materials              
August 2002 21 44 20 10 3 2 48
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
MRO Supplies              
August 2002 54 33 10 3 0 0 21
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

In Short Supply

Steel — 6th month; and Steel, Coated — 3rd month.

Up in Price

Caustic Soda — 3rd month; Chemicals — 2nd month; Corrugated Containers — 3rd month; Flour — 2nd month; Fuel Oil; Methanol; Natural Gas; Phenol; Plastics — 2nd month; Polyethylene, High Density — 5th month; Resins — 2nd month; Soybean Oil; Steel — 7th month; Steel, Coated — 3rd month; Steel — Galvanized — 2nd month; and Wheat — 2nd month.

Down in Price

Aluminum; Corrugated Containers (also up in price); and Natural Gas — 2nd month (also up 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 September 2002 data will be released at 10:00 a.m. (ET) on October 1, 2002.


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