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August 2004 Manufacturing ISM Report On Business®

FOR RELEASE: September 1, 2004

CONTACT: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
PMI at 59.0%

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 August 2004.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in August for the 15th consecutive month, while the overall economy grew for the 34th 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 rate of growth in the manufacturing sector decelerated during August, but overall the sector is still quite positive as both new orders and production remain at high levels. August's PMI at 59 percent represents the end of a period of nine consecutive months when the PMI was at 60 percent or higher."

The ISM Prices Index regained momentum as the prices manufacturers pay are driven by customer demand and energy costs. ISM's Customers' Inventories Index indicates that customer inventories are too low at this time, although the rate of decline decelerated significantly during August. The Backlog of Orders Index indicates that order backlogs increased in August. The New Export Orders and Imports Indexes continued to grow in August.

Comments from respondents this month focus on energy costs, price inflation in basic materials — particularly steel — and slowing sales growth. The growth in inventories seems to be part of a "catch up" strategy to meet higher demand on the sales side; this seems to be particularly the case with the continued strength in imports. Many still rate their business as "strong," while others believe they are starting to see new orders taper off.

ISM's PMI registered 59 percent in August, a decrease of 3 percentage points when compared to 62 percent in July. ISM's New Orders Index declined 3.5 percentage points from 64.7 percent in July to 61.2 percent in August. ISM's Production Index decreased 6.6 percentage points from 66.1 percent in July to 59.5 percent in August. The ISM Employment Index is at 55.7 percent for August, a decrease of 1.6 percentage points when compared to the 57.3 percent reported in July.

ISM's Supplier Deliveries Index registered 63.2 percent, 1 percentage point lower than July's 64.2 percent. ISM's Inventories Index registered 51.7 percent in August, up from the 49.9 percent reported in July. ISM's Customers' Inventories Index for August is at 45.5 percent, an increase of 8 percentage points compared to the July reading of 37.5 percent. ISM's Prices Index in August is 81.5 percent, 4.5 percentage points higher than the 77 percent reported in July.

ISM's Backlog of Orders Index decreased 3 percentage points, registering 55 percent in August compared to 58 percent in July. ISM's New Export Orders Index registered 54.2 percent, a decrease of 2 percentage points from July's 56.2 percent. ISM's Imports Index decreased 0.7 percentage point to 59.2 percent in August, down from 59.9 percent in July.

"August was another good month for the manufacturing sector. While the near-term outlook remains positive, both the Inventories and Customers' Inventories Indexes show signs of inventory building. Such a build may be justified if it is to meet additional sales demand, and if new orders and production remain strong," said Ore.

In August, 17 industries reported growth: Leather; Miscellaneous*; Furniture; Rubber & Plastic Products; Electronic Components & Equipment; Wood & Wood Products; Instruments & Photographic Equipment; Primary Metals; Chemicals; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Glass, Stone & Aggregate; Printing & Publishing; Fabricated Metals; Food; Paper; and Textiles.

"ABS, Alloy Steel; Aluminum; Aluminum Castings; Aluminum Extrusions; Benzene; Butadeine; Carbon Steel; Cardboard; Castings — Iron; Caustic Soda; Chemicals; Cold Rolled Steel; Copper; Corrugated Cartons; Diesel Fuel; Energy; Fabricated Metal Parts; Freight; Fuel Oil; Gasoline; HDPE Products; Hardwood Lumber; Hot Rolled Steel; LDPE Products; Latex; Linerboard; Lumber; Natural Gas; Oil Products; Packaging; Paint; Paper; Plastics; Plastic Products; Plastic Resins; Polyester; Polyethylene Film; Polypropylene; PVC; Resin; Rubber; Stainless Steel Products; Steel; Steel Products (various forms) Styrene; and Titanium Products. The commodities reported down in price are Cheese; Corn; Natural Gas; and Soybean Oil. The commodities listed in short supply are Aluminum, Chemicals, Hot Rolled Steel; Semiconductors; Stainless Steel; Steel; and Steel Products (various forms)," Ore stated.

AUGUST 2004 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
August vs July
Rate of Change
August vs July
PMI 59.0 Growing Slower
New Orders 61.2 Growing Slower
Production 59.5 Growing Slower
Employment 55.7 Growing Slower
Supplier Deliveries 63.2 Slowing Slower
Inventories 51.7 Growing From Contracting
Customers' Inventories 45.5 Too Low Slower
Prices 81.5 Increasing Faster
Backlog of Orders 55.0 Growing Slower
New Export Orders 54.2 Growing Slower
Imports 59.2 Growing Slower

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

PMI

The PMI indicates that the manufacturing economy grew in August for the 15th consecutive month. The PMI for August registered 59 percent, a decrease of 3 percentage points compared to the July reading of 62 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 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 (61.9 percent) corresponds to a 7 percent increase in real gross domestic product (GDP). In addition, if the PMI for August (59 percent) is annualized, this corresponds to a 5.9 percent increase in GDP.

Month Aug'04 Jul'04 Jun'04 May'04 Apr'04
PMI% 59.0 62.0 61.1 62.8 62.4
Month Mar'04 Feb'04 Jan'04 Dec'03 Nov'03
PMI% 62.5 61.4 63.6 63.4 61.3
Month Oct'03 Sep'03 Aug'03 Jul'03 Jun'03
PMI% 57.1 54.7 55.0 52.6 50.4

New Orders

ISM's New Orders Index grew in August with a reading of 61.2 percent. The index is 3.5 percentage points lower than the 64.7 percent registered in July, and it is the 16th 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). Thirteen industries reported increases for the month of August: Leather; Miscellaneous*; Furniture; Glass, Stone & Aggregate; Primary Metals; Electronic Components & Equipment; Wood & Wood Products; Printing & Publishing; Transportation & Equipment; Chemicals; Rubber & Plastic Products; Instruments & Photographic Equipment; and Industrial & Commercial Equipment & Computers.

New Orders %Better %Same %Worse Net Index
August 2004 36 47 17 +19 61.2
July 2004 36 51 13 +23 64.7
June 2004 38 49 13 +25 60.0
May 2004 48 38 14 +34 62.8

Production

ISM's Production Index is 59.5 percent in August, 6.6 percentage points lower than the 66.1 percent reported in July. August is the 16th consecutive month of growth in the Index. 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 August, 14 registered growth: Leather; Miscellaneous*; Furniture; Wood & Wood Products; Chemicals; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Glass, Stone & Aggregate; Instruments & Photographic Equipment; Transportation & Equipment; Food; Paper; Electronic Components & Equipment; and Fabricated Metals.

Production %Better %Same %Worse Net Index
August 2004 32 51 17 +15 59.5
July 2004 34 55 11 +23 66.1
June 2004 40 49 11 +29 63.2
May 2004 46 43 11 +35 64.8

Employment

ISM's Employment Index grew for the 10th consecutive month, following a 37-month trend of contraction. The index registered 55.7 percent in August compared to 57.3 percent in July, a decrease of 1.6 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 11 industries reporting growth in employment during August are: Miscellaneous*; Furniture; Rubber & Plastic Products; Primary Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Wood & Wood Products; Instruments & Photographic Equipment; Food; Chemicals; and Transportation & Equipment.

Employment %Higher %Same %Lower Net Index
August 2004 24 61 15 +9 55.7
July 2004 25 65 10 +15 57.3
June 2004 35 56 9 +26 59.7
May 2004 36 57 7 +29 61.9

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 32nd consecutive month in August. ISM's Supplier Deliveries Index for August registered 63.2 percent, a decrease of 1 percentage point compared to July's reading of 64.2 percent. A reading above 50 percent indicates slower deliveries. The 16 industries reporting slower supplier deliveries in August are: Apparel; Miscellaneous*; Textiles; Rubber & Plastic Products; Paper; Printing & Publishing; Fabricated Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Chemicals; Primary Metals; Wood & Wood Products; Instruments & Photographic Equipment; Furniture; and Food.

Supplier
Deliveries
%Slower %Same %Faster Net Index
August 2004 31 66 3 +28 63.2
July 2004 35 61 4 +31 64.2
June 2004 39 58 3 +36 68.1
May 2004 41 57 2 +39 69.4

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

Inventories

Manufacturers' inventories reversed direction and grew slightly in August as ISM's Inventories Index registered 51.7 percent, an increase of 1.8 percentage points when compared to July's 49.9 percent. 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 10 industries reporting higher inventories in August are: Leather; Instruments & Photographic Equipment; Fabricated Metals; Electronic Components & Equipment; Textiles; Transportation & Equipment; Food; Primary Metals; Rubber & Plastic Products; and Furniture.

Inventories %Higher %Same %Lower Net Index
August 2004 23 61 16 +7 51.7
July 2004 17 63 20 -3 49.9
June 2004 20 62 18 +2 51.1
May 2004 19 61 20 -1 49.3

Customers' Inventories**

The August Customers' Inventories Index is at 45.5 percent, an increase of 8 percentage points compared to the July reading of 37.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 39th consecutive month that the index has registered below 50 percent. Four industries reported higher customer inventories during August and they are: Food; Paper; Rubber & Plastic Products; and Electronic Components & Equipment.

Customers'
Inventories
%Reporting % Too High % About Right % Too Low Net Index
August 2004 73 11 69 20 -9 45.5
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

Prices**

ISM's Prices Index indicates manufacturers continued to pay higher prices in August. This is the 30th consecutive month the index has registered higher prices. August's index is at 81.5 percent, 4.5 percentage points higher than July's reading of 77 percent. During August, 67 percent of supply executives reported paying higher prices and 4 percent reported paying lower prices, while 29 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 August: Tobacco; Textiles; Furniture; Petroleum; Primary Metals; Printing & Publishing; Miscellaneous*; Fabricated Metals; Wood & Wood Products; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Chemicals; Food; Apparel; Glass, Stone & Aggregate; Instruments & Photographic Equipment; Electronic Components & Equipment; and Paper.

Prices %Higher %Same %Lower Net Index
August 2004 67 29 4 +63 81.5
July 2004 58 38 4 +54 77.0
June 2004 66 30 4 +62 81.0
May 2004 74 24 2 +72 86.0

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 55 percent, indicating manufacturers' backlogs in August grew at a slightly slower rate when compared to July. Of the 89 percent of respondents who report their backlog of orders, 29 percent reported greater backlogs, 19 percent reported smaller backlogs, and 52 percent reported no change from July. The 12 industries reporting an increase in order backlogs during the month are: Miscellaneous*; Primary Metals; Paper; Rubber & Plastic Products; Wood & Wood Products; Glass, Stone & Aggregate; Instruments & Photographic Equipment; Printing & Publishing; Chemicals; Fabricated Metals; Industrial & Commercial Equipment & Computers; and Furniture.

Backlog
of Orders
%Reporting %Greater %Same %Less Net Index
August 2004 89 29 52 19 +10 55.0
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

New Export Orders

ISM's New Export Orders Index for August registered 54.2 percent, a decrease of 2 percentage points when compared to July's index of 56.2 percent. This is the 21st consecutive month of growth in export orders. The eight industries reporting growth in new export orders in August are: Miscellaneous*; Primary Metals; Food; Fabricated Metals; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Transportation & Equipment; and Electronic Components & Equipment.

New Export
Orders
%Reporting %Better %Same %Worse Net Index
August 2004 76 19 72 9 +10 54.2
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

Imports

Imports of materials by manufacturers grew during August as the Imports Index registered 59.2 percent. The index declined 0.7 percentage point when compared to July's index of 59.9 percent, indicating a slightly slower rate of growth. The 10 industries reporting growth in import activity for August are: Furniture; Glass, Stone & Aggregate; Miscellaneous*; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Wood & Wood Products; Fabricated Metals; Chemicals; Food; and Electronic Components & Equipment.

Imports %Reporting %Higher %Same %Lower Net Index
August 2004 78 23 71 6 +17 59.2
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

*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 declined 9 days to 96 days. Average leadtime for Production Materials increased 1 day to 46 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies increased 1 day to 23 days.

  Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
August 2004 26 11 13 21 22 7 96
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
Production Materials              
August 2004 24 39 22 10 4 1 46
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
MRO Supplies              
August 2004 52 36 8 3 1 0 23
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

In Short Supply

Aluminum; Chemicals; Hot Rolled Steel; Semiconductors; Stainless Steel — 8th month; Steel — 8th month; and Steel Products (various forms) — 2nd month.

Up in Price

ABS; Alloy Steel; Aluminum — 10th month; Aluminum Castings — 2nd month; Aluminum Extrusions; Benzene; Butadiene; Carbon Steel — 2nd month; Cardboard — 2nd month; Castings - Iron; Caustic Soda — 4th month; Chemicals — 7th month; Cold Rolled Steel; Copper; Corrugated Cartons — 7th month; Diesel Fuel — 6th month; Energy — 8th month; Fabricated Metal Parts; Freight — 6th month; Fuel Oil — 8th month; Gasoline — 8th month; Hardwood Lumber — 4th month; HDPE Products — 6th month; Hot Rolled Steel; Latex; LDPE Products — 3rd month; Linerboard — 3rd month; Lumber; Natural Gas* — 25th month; Oil Products — 2nd month; Packaging — 3rd month; Paint; Paper — 6th month; Plastic Products — 7th month; Plastic Resins; Plastics; Polyester; Polyethylene Film; Polypropylene; PVC; Resin; Rubber; Stainless Steel Products — 2nd month; Steel — 11th month; Steel Products (various forms); Styrene; and Titanium Products.

Down in Price

Cheese; Corn; Natural Gas* — 2nd month; and Soybean Oil.

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


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