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August 2003 Manufacturing ISM Report On Business®

FOR RELEASE: September 2, 2003

CONTACT: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
PMI at 54.7%

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 2003.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in August for the second consecutive month, while the overall economy grew for the 22nd 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 showed improvement for the second month as the PMI is at its highest level since December of last year. Though two months of growth do not establish a trend, there is strength in the various segments of this report that we have not seen for some time. New Orders and Production have both been above 50 percent for four consecutive months; the continuation of a second half recovery appears on track."

ISM's Backlog of Orders Index indicates that order backlogs improved again in August. However, manufacturing Employment continued to decline in August as the index remained below the breakeven point (an index of 50 percent) for the 35th consecutive month. ISM's Prices Index indicates that manufacturers experienced higher prices for the 18th consecutive month. New Export Orders grew in August for the 20th consecutive month, while August's Imports Index grew for the 10th consecutive month.

Comments from purchasing and supply managers appear to be divided by industry. Reports from the Food and Primary Metals industries indicate continuing softness, while the Electronic Components & Equipment, Fabricated Metals, and Industrial & Commercial Equipment & Computers industries claim to be improving. Manufacturers supplying the construction industry continue to mention a positive effect from the seasonal upswing in the industry. Natural gas costs have stabilized somewhat, but are still at a rate that concerns manufacturers.

ISM's PMI is 54.7 percent in August, an increase of 2.9 percentage points when compared to 51.8 in July. ISM's New Orders Index rose 3 percentage points from 56.6 percent in July to 59.6 percent in August. ISM's Production Index rose 8.3 percentage points from 53.3 percent in July to 61.6 percent in August. The ISM Employment Index is at 45.9 percent for August, a decrease of 0.2 percentage point when compared to the 46.1 percent reported in July.

ISM's Supplier Deliveries Index registered 53.3 percent, 2.2 percentage points higher than July's 51.1 percent. ISM's Inventories Index declined to 42.5 percent in August from the 45.9 percent reported in July. ISM's Customers' Inventories Index for August is at 43 percent, an increase of 0.5 percentage point compared to the July reading of 42.5 percent. ISM's Prices Index in August is 53 percent, the same as reported in July.

ISM's Backlog of Orders Index increased 0.5 percentage point, registering 51.5 percent in August compared to 51 percent in July. ISM's New Export Orders Index registered 55.3 percent, up 1.5 percentage points from July's 53.8 percent, while ISM's Imports Index declined 0.9 percentage point to 55.1 percent in August from 56 percent in July.

"The surge in August Production is very positive for the manufacturing sector. The Production Index is the highest that it has been since June 1999, when it also registered 61.6 percent. The New Orders Index reflected its highest reading since January 2003. The overall picture is encouraging as many manufacturers traditionally experience an upturn during the last four months of the year," said Ore.

Of the 20 industries in the manufacturing sector, 13 industries reported growth: Leather; Furniture; Wood & Wood Products; Apparel; Instruments & Photographic Equipment; Miscellaneous*; Electronic Components & Equipment; Printing & Publishing; Chemicals; Transportation & Equipment; Fabricated Metals; Industrial & Commercial Equipment & Computers; and Glass, Stone, & Aggregate.

"Sulfuric Acid is the only commodity reported in short supply. Commodities reported up in price are: Aluminum; Aluminum Extrusions; Caustic Soda; Chemicals; Copper; Natural Gas; Nickel; Stainless Steel; Steel; and Steel Scrap. The commodities reported down in price are Caustic Soda; Cocoa; Corrugated Cartons; Ethylene; Natural Gas; PET; Plastic Resins; Polypropylene; and Steel — Coated," Ore stated.

AUGUST 2003 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
Aug vs July
Rate of Change
Aug vs July
PMI 54.7 Growing Faster
New Orders 59.6 Growing Faster
Production 61.6 Growing Faster
Employment 45.9 Contracting Faster
Supplier Deliveries 53.3 Slowing Faster
Inventories 42.5 Contracting Faster
Customers' Inventories 43.0 Too Low Slower
Prices 53.0 Increasing Same
Backlog of Orders 51.5 Growing Faster
New Export Orders 55.3 Growing Faster
Imports 55.1 Growing Slower

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

PMI

The PMI indicates that the manufacturing economy grew in August for the second consecutive month. The PMI for August registered 54.7 percent, an increase of 2.9 percentage points compared to the July reading of 51.8 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 42.9 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. The past relationship between the PMI and the overall economy indicates that the average PMI for January through August (50.2 percent) corresponds to a 2.7 percent increase in real gross domestic product (GDP). However, if the PMI for August (54.7 percent) turned out to be the annual average for 2003, this would correspond to a 4.3 percent increase in GDP.

Month Aug'03 Jul'03 Jun'03 May'03 Apr'03
PMI% 54.7 51.8 49.8 49.4 45.4
Month Mar'02 Feb'03 Jan'03 Dec'02 Nov'02
PMI% 46.2 50.5 53.9 55.2 50.5
Month Oct'02 Sep'02 Aug'02 Jul'02 Jun'02
PMI% 49.7 50.7 50.3 50.7 55.2

New Orders

ISM's New Orders Index grew in August with a reading of 59.6 percent. The index is 3 percentage points higher than the 56.6 percent registered in July, and it is the fourth 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). Industries reporting increases for the month of August are: Leather; Furniture; Wood & Wood Products; Printing & Publishing; Miscellaneous*; Electronic Components & Equipment; Apparel; Glass, Stone, & Aggregate; Chemicals; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Transportation & Equipment; Fabricated Metals; and Paper.

New Orders %Better %Same %Worse Net Index
August 2003 35 48 17 +18 59.6
July 2003 30 50 20 +10 56.6
June 2003 25 60 15 +10 52.2
May 2003 29 54 17 +12 51.9

Production

ISM's Production Index is 61.6 percent in August, 8.3 percentage points higher than the 53.3 percent reported in July, reflecting the fourth 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 20 industries reporting in August, the following registered growth: Leather; Instruments & Photographic Equipment; Furniture; Wood & Wood Products; Printing & Publishing; Chemicals; Apparel; Miscellaneous*; Transportation & Equipment; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; Fabricated Metals; Paper; and Rubber & Plastic Products.

Production %Better %Same %Worse Net Index
August 2003 33 52 15 +18 61.6
July 2003 25 53 22 +3 53.3
June 2003 25 60 15 +10 52.9
May 2003 25 60 15 +10 51.5

Employment

ISM's Manufacturing Employment Index remained below 50 percent in August for the 35th consecutive month. The index registered 45.9 percent in August compared to 46.1 percent in July, a decrease of 0.2 percentage point. An Employment Index above 47.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The industries reporting growth in Employment during August are: Apparel; Wood & Wood Products; Transportation & Equipment; Instruments & Photographic Equipment; Miscellaneous*; Electronic Components & Equipment; and Furniture.

Employment %Higher %Same %Lower Net Index
August 2003 12 67 21 -9 45.9
July 2003 14 65 21 -7 46.1
June 2003 15 67 18 -3 46.2
May 2003 13 65 22 -9 43.0

Supplier Deliveries

ISM's Supplier Deliveries Index indicates delivery performance is slower when comparing August to July. August's reading of 53.3 percent is an increase of 2.2 percentage points when compared to July's reading of 51.1 percent. A reading above 50 percent indicates slower deliveries. The seven industries reporting slower supplier deliveries in August are: Instruments & Photographic Equipment; Glass, Stone, & Aggregate; Printing & Publishing; Primary Metals; Electronic Components & Equipment; Fabricated Metals; and Industrial & Commercial Equipment & Computers.

Supplier
Deliveries
%Slower %Same %Faster Net Index
August 2003 10 88 2 +8 53.3
July 2003 10 85 5 +5 51.1
June 2003 6 89 5 +1 50.0
May 2003 8 87 5 +3 51.3

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 August as the Inventories Index registered 42.5 percent. This compares to 45.9 percent reported in July. The Inventories Index has been under 50 percent for 43 consecutive months. An Inventories Index greater than 42.1 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 industries reporting higher inventories in August are: Apparel; Glass, Stone, & Aggregate; and Miscellaneous*.

Inventories %Higher %Same %Lower Net Index
August 2003 11 67 22 -11 42.5
July 2003 16 56 28 -12 45.9
June 2003 12 60 28 -16 41.3
May 2003 14 65 21 -7 46.1

Customers' Inventories

The Customers' Inventories Index is at 43 percent, an increase of 0.5 percentage point compared to the July reading of 42.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 27th consecutive month that the index has registered below 50 percent. Glass, Stone, & Aggregate and Rubber & Plastic Products are the industries reporting excessive customers' inventories during August.

Customers'
Inventories
%Reporting % Too High % About Right % Too Low Net Index
August 2003 74 9 68 23 -14 43.0
July 2003 81 8 69 23 -15 42.5
June 2003 79 12 67 21 -9 45.5
May 2003 78 10 70 20 -10 45.0

Prices

ISM's Prices Index indicates manufacturers continued to pay higher prices in August. This is the 18th consecutive month the index has registered higher prices. With August's index at 53 percent, it is the same as July's reading of 53 percent. In August, 19 percent of supply executives reported paying higher prices and 13 percent reported paying lower prices, while 68 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. The industries reporting paying higher prices in August are: Tobacco; Petroleum; Textiles; Food; Glass, Stone, & Aggregate; Fabricated Metals; Transportation & Equipment; Furniture; Rubber & Plastic Products; Instruments & Photographic Equipment; Primary Metals; and Industrial & Commercial Equipment & Computers.

Prices %Higher %Same %Lower Net Index
August 2003 19 68 13 +6 53.0
July 2003 21 64 15 +6 53.0
June 2003 26 61 13 +13 56.5
May 2003 21 61 18 +3 51.5

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 51.5 percent, indicating manufacturers' backlogs in August were higher when compared to July. Of the 87 percent of respondents who report their backlog of orders, 22 percent reported greater backlogs, 19 percent reported smaller backlogs, and 59 percent reported no change from July. The industries reporting an increase in order backlogs during the month are: Furniture; Wood & Wood Products; Apparel; Printing & Publishing; Rubber & Plastic Products; Instruments & Photographic Equipment; Paper; Miscellaneous*; Fabricated Metals; Electronic Components & Equipment; and Chemicals.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
August 2003 87 22 59 19 +3 51.5
July 2003 89 22 58 20 +2 51.0
June 2003 84 18 64 18 0 50.0
May 2003 86 21 60 19 +2 51.0

New Export Orders

ISM's New Export Orders Index for August registered 55.3 percent, an increase of 1.5 percentage points when compared to July's index of 53.8 percent. This is the 20th consecutive month of growth in export orders. The industries reporting growth in new export orders in August are: Glass, Stone, & Aggregate; Rubber & Plastic Products; Furniture; Instruments & Photographic Equipment; Miscellaneous*; Food; Industrial & Commercial Equipment & Computers; Chemicals; Fabricated Metals; Electronic Components & Equipment; and Transportation & Equipment.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
August 2003 76 19 74 7 +12 55.3
July 2003 78 18 73 9 +9 53.8
June 2003 77 18 77 5 +13 54.4
May 2003 75 16 72 12 +4 50.8

Imports

Imports of materials by manufacturers grew during August as the Imports Index registered 55.1 percent. The index declined 0.9 percentage point when compared to July's index of 56 percent. The 10 industries reporting growth in import activity for August are: Instruments & Photographic Equipment; Apparel; Industrial & Commercial Equipment & Computers; Wood & Wood Products; Miscellaneous*; Paper; Chemicals; Fabricated Metals; Electronic Components & Equipment; and Transportation & Equipment.

Imports %Reporting %Higher %Same %Lower Net Index
August 2003 79 17 77 6 +11 55.1
July 2003 82 17 76 7 +10 56.0
June 2003 80 21 73 6 +15 56.4
May 2003 79 16 75 9 +7 52.2

*Miscellaneous is a preponderance of jewelry, toys, sporting goods, and musical instruments.

Buying Policy

Average commitment leadtime for Capital Expenditures decreased 10 days to 97 days. Average leadtime for Production Materials decreased three days to 45 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies decreased one day to 21 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
August 2003 25 10 16 20 22 7 97
July 2003 25 8 13 24 19 11 107
June 2003 25 12 10 24 20 9 101
May 2003 23 9 15 23 21 9 104
Production Materials              
August 2003 24 41 19 12 3 1 45
July 2003 21 43 22 9 3 2 48
June 2003 23 44 19 9 4 1 45
May 2003 21 45 20 8 5 1 46
MRO Supplies              
August 2003 55 35 6 3 1 0 21
July 2003 52 38 7 2 1 0 22
June 2003 55 33 8 3 1 0 22
May 2003 54 36 8 1 1 0 21

In Short Supply

Sulfuric Acid is the only commodity reported in short supply.

Up in Price

Aluminum; Aluminum Extrusions; Caustic Soda* — 15th month; Chemicals — 2nd month; Copper; Natural Gas* — 13th month; Nickel; Stainless Steel; Steel; and Steel Scrap.

Down in Price

Caustic Soda*; Cocoa; Corrugated Cartons — 6th month; Ethylene; Natural Gas* — 5th month; PET; Plastic Resins; Polypropylene; and Steel — Coated.

*Reported as both up and down in price.

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 42.9 percent, over a period of time, indicates that the overall economy, or Gross Domestic Product (GDP), is generally expanding; below 42.9 percent, it is generally declining. The distance from 50 percent or 42.9 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 September 2003 data will be released at 10:00 a.m. (ET) on October 1, 2003.


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