September 2002 Manufacturing ISM Report On Business®

FOR RELEASE: October 1, 2002

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
PMI at 49.5%

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 September 2002.

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

(Tempe, Arizona) — Economic activity in the manufacturing sector declined in September after seven consecutive months of growth. The overall economy grew for the 11th 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 PMI has averaged 50.2 percent over the last three months. After a strong first quarter, the manufacturing sector has softened significantly. Stagnant and sluggish are apt descriptions for manufacturing at this time. Much of this month's data, as might be expected when the indexes are at or near the breakeven point, is mixed and lacks a clear trend. For instance, we see an obvious dichotomy with the Supplier Deliveries Index slowing at a rapid pace while the Backlog of Orders Index is declining."

ISM's Backlog of Orders Index indicates that order backlogs declined for the third consecutive month. ISM's Supplier Deliveries Index reflects slower deliveries for the ninth consecutive month. Manufacturing employment continued to decline in September as the index remained below the breakeven point (an index of 50 percent) for the 24th consecutive month. ISM's Prices Index is above 50 percent as manufacturers experienced higher prices for the seventh consecutive month. New Export Orders grew in September for the ninth consecutive month. September's Imports Index grew for the 10th consecutive month.

Comments from purchasing and supply executives express concern about energy prices and particularly the possible impact of a war with Iraq. Others indicate recovery is ongoing in their industry, but the rate is slow. Many worry about demand in the short term.

ISM's PMI is 49.5 percent in September, a decrease of 1 percentage point when compared to 50.5 in August. ISM's New Orders Index rose from 49.7 percent in August to 50.2 percent in September. ISM's Production Index declined 4.7 percentage points from 55.6 percent in August to 50.9 percent in September. The ISM Employment Index is at 44.9 percent for September, a decrease of 0.9 percentage point when compared to the 45.8 percent reported in August.

ISM's Supplier Deliveries Index registered 55.7 percent compared to 53.4 percent in August. ISM's Inventories Index declined to 43.6 percent. ISM's Customers' Inventories Index for September is at 40.5 percent, a decrease of 2 percentage points compared to the August reading of 42.5 percent. ISM's Prices Index in September is 62.5 percent, an increase of 1 percentage point from August's 61.5 percent. ISM's Backlog of Orders Index declined 0.5 percentage point from 45 percent in August to 44.5 percent in September.

ISM's New Export Orders Index registered 51.8 percent, down 0.9 percentage point from August's 52.7 percent. The rate of growth in imports increased as the Imports Index rose from 51.9 percent in August to 54.7 percent in September.

"Manufacturing activity declined slightly during September based on the decline in the PMI," added Ore. "Seasonal factors played a very significant role in determining several of the indexes this month — New Orders and Production were particularly impacted by strong seasonal influence. At this level of activity, manufacturing is struggling while the overall economy is seeing modest growth."

Of the 20 industries in the manufacturing sector, 13 industries reported growth: Petroleum; Rubber & Plastic Products; Wood & Wood Products; Textiles; Instruments & Photographic Equipment; Apparel; Transportation & Equipment; Paper; Tobacco; Printing & Publishing; Primary Metals; Fabricated Metals; and Electronic Components & Equipment.

"Steel and Sulfuric Acid are the only commodities reported in short supply. Commodities reported up in price are: Butadiene, Caustic Soda, Corrugated Containers, Natural Gas, Plastic Film, Plastic Resins, Polyethylene — High Density, Polyethylene — Low Density, Polypropylene, Resins, and Steel. No reports of commodities down in price," Ore stated.

SEPTEMBER 2002 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
Sep vs Aug
Rate of Change
Sep vs Aug
PMI 49.5 Contracting From Growing
New Orders 50.2 Growing From Contracting
Production 50.9 Growing Slower
Employment 44.9 Contracting Faster
Supplier Deliveries 55.7 Slowing Faster
Inventories 43.6 Contracting Faster
Customers' Inventories 40.5 Too Low Faster
Prices 62.5 Increasing Faster
Backlog of Orders 44.5 Contracting Faster
New Export Orders 51.8 Growing Slower
Imports 54.7 Growing Faster

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

PMI

The PMI indicates that the manufacturing economy failed to grow in September after seven consecutive months of expansion. With the index at 49.5 percent, this is a 1 percentage point decrease compared to the August reading 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 September PMI indicates that the overall economy is growing, but the manufacturing sector is in decline. Ore said, "The past relationship between the PMI and the overall economy indicates that the average PMI for the months of January through September (52.9 percent) corresponds to 3.7 percent growth in real gross domestic product (GDP). However, if the PMI for September (49.5 percent) turned out to be the annual average for 2002, it would correspond to a 2.5 percent increase in GDP."

Month Sep'02 Aug'02 Jul'02 Jun'02 May'02
PMI% 49.5 50.5 50.5 56.2 55.7
Month Apr'02 Mar'02 Feb'02 Jan'02 Dec'01
PMI% 53.9 55.6 54.7 49.9 48.1
Month Nov'01 Oct'01 Sep'01 Aug'01 Jul'01
PMI% 44.7 39.5 46.2 47.9 43.9

New Orders

ISM's New Orders Index grew slightly in September registering 50.2 percent. The index is 0.5 percentage point higher than the 49.7 percent registered in August and returns to growth after one month of contraction. 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 September are: Petroleum; Rubber & Plastic Products; Instruments & Photographic Equipment; Transportation & Equipment; Wood & Wood Products; Textiles; Primary Metals; Paper; Food; Electronic Components & Equipment; Printing & Publishing; and Chemicals.

New Orders %Better %Same %Worse Net Index
September 2002 30 47 23 +7 50.2
August 2002 23 52 25 -2 49.7
July 2002 26 49 25 +1 50.4
June 2002 38 50 12 +26 60.8

Production

ISM's Production Index is 50.9 percent in September, 4.7 percentage points lower than the 55.6 percent reported in August. This is the 10th 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 September, the following registered growth: Tobacco; Textiles; Rubber & Plastic Products; Wood & Wood Products; Paper; Transportation & Equipment; Fabricated Metals; Primary Metals; Electronic Components & Equipment; Instruments & Photographic Equipment; and Printing & Publishing.

Production %Better %Same %Worse Net Index
September 2002 27 55 18 +9 50.9
August 2002 24 57 19 +5 55.6
July 2002 24 58 18 +6 55.7
June 2002 34 56 10 +24 61.4

Employment

ISM's Manufacturing Employment Index remained below 50 percent in September for the 24th consecutive month. The Index registered 44.9 percent in September compared to 45.8 percent in August, a decrease of 0.9 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: Wood & Wood Products; Instruments & Photographic Equipment; Printing & Publishing; and Paper.

Employment %Higher %Same %Lower Net Index
September 2002 10 69 21 -11 44.9
August 2002 10 71 19 -9 45.8
July 2002 9 73 18 -9 45.0
June 2002 18 67 15 +3 49.7

Supplier Deliveries

ISM's Supplier Deliveries Index indicates delivery performance is slower in September compared to August (a reading above 50 percent indicates slower deliveries). At 55.7 percent, the Index is 2.3 percentage points higher than August's 53.4 percent. The industries reporting slower supplier deliveries in September are: Apparel; Transportation & Equipment; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; Glass, Stone & Aggregate; Textiles; Primary Metals; Paper; Printing & Publishing; and Fabricated Metals.

Supplier Deliveries %Slower %Same %Faster Net Index
September 2002 16 81 3 +13 55.7
August 2002 13 83 4 +9 53.4
July 2002 15 82 3 +12 54.9
June 2002 14 82 4 +10 55.2

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 September as the Inventories Index registered 43.6 percent. This compares to 45.2 percent as reported in August. The Inventories Index has been under 50 percent for 32 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 four industries reporting higher inventories in September are: Printing & Publishing; Rubber & Plastic Products; Wood & Wood Products; and Paper.

Inventories %Higher %Same %Lower Net Index
September 2002 13 62 25 -12 43.6
August 2002 18 58 24 -6 45.2
July 2002 12 57 31 -19 41.8
June 2002 14 59 27 -13 43.7

Customers' Inventories

The Customers' Inventories Index is at 40.5 percent, a decrease of 2 percentage points compared to the August reading of 42.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 16th consecutive month that the Index has registered below 50. Glass, Stone & Aggregate is the only industry reporting excessive customers' inventories in September.

Customers' Inventories %Reporting % Too High % About Right % Too Low Net Index
September 2002 81 6 69 25 -19 40.5
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

Prices

ISM's Prices Index indicates manufacturers continued to pay higher prices in September. This is the seventh consecutive month the Index has registered higher prices. With the Index at 62.5 percent, it is 1 percentage point higher than August's 61.5 percent. In September, 32 percent of supply executives reported paying higher prices and 2 percent reported paying lower prices, while 66 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 September are: Petroleum; Food; Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments); Glass, Stone & Aggregate; Textiles; Primary Metals; Chemicals; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Wood & Wood Products; Printing & Publishing; Paper; Electronic Components & Equipment; Furniture; Transportation & Equipment; and Rubber & Plastic Products.

Prices %Higher %Same %Lower Net Index
September 2002 32 66 2 +30 62.5
August 2002 34 58 8 +26 61.5
July 2002 41 53 6 +35 68.3
June 2002 40 53 7 +33 65.5

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 44.5 percent, indicating a slightly faster decline in manufacturers' backlogs as the Index declined 0.5 percentage point from August's report of 45 percent. Of the 88 percent of respondents who report their backlog of orders, 16 percent reported greater backlogs, 27 percent reported smaller backlogs, and 57 percent reported no change from August. The industries reporting an increase in order backlog during the month are: Rubber & Plastic Products; Glass, Stone & Aggregate; Paper; and Transportation & Equipment.

Backlog of Orders %Reporting %Greater %Same %Less Net Index
September 2002 88 16 57 27 -11 44.5
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

New Export Orders

ISM's New Export Orders Index for September registered 51.8 percent, a decrease of 0.9 percentage point when compared to August's index of 52.7 percent. This is the ninth consecutive month the Index has indicated growth. The industries reporting growth in new export orders in September are: Textiles; Transportation & Equipment; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Primary Metals; Fabricated Metals; Paper; Furniture; and Printing & Publishing.

New Export Orders %Reporting %Better %Same %Worse Net Index
September 2002 76 16 76 8 +8 51.8
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

Imports

Imports of materials by manufacturers continued to grow in September as the Imports Index registered 54.7 percent. The Index indicates a faster rate of growth as evidenced by the 2.8 percentage points increase when compared to August's Index of 51.9 percent. The 11 industries reporting growth in import activity for September are: Apparel; Tobacco; Fabricated Metals; Transportation & Equipment; Electronic Components & Equipment; Furniture; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Printing & Publishing; Chemicals; and Wood & Wood Products.

Imports %Reporting %Higher %Same %Lower Net Index
September 2002 74 19 74 7 +12 54.7
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

Buying Policy

Average commitment leadtime for Capital Expenditures declined 4 days to 98 days. Average leadtime for Production Materials declined 2 days to 46 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies declined 1 day to 20 days.

Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
September 2002 25 9 15 22 22 7 98
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
Production Materials              
September 2002 24 45 16 10 3 2 46
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
MRO Supplies              
September 2002 57 31 10 2 0 0 20
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

In Short Supply

Steel — 7th month; and Sulfuric Acid.

Up in Price

Butadiene; Caustic Soda — 4th month; Corrugated Containers — 4th month; Natural Gas — 2nd month; Plastic Film; Plastic Resins; Plastic Shrink Wrap; Polyethylene, High Density — 6th month; Polyethylene, Low Density; Polypropylene; Resins — 3rd month; and Steel — 8th month.

Down in Price

No commodities down 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 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 42.7 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 October 2002 data will be released at 10:00 a.m. (ET) on November 1, 2002.



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