October 2004 Manufacturing ISM Report On Business®

FOR RELEASE: November 1, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
PMI at 56.8%

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 October 2004.


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

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in October for the 17th consecutive month, while the overall economy grew for the 36th 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. "Strong growth continues in the sector, but at a slower rate than in September. New orders and production remain strong, and employment continues to expand. However, energy prices and commodity price inflation are major concerns for manufacturing buyers."

The ISM Prices Index still indicates that there is significant upward pressure on prices. ISM's Customers' Inventories Index indicates that customer inventories are too low at this time. The Backlog of Orders Index indicates that order backlogs decreased in October. The New Export Orders and Imports Indexes continued to grow in October.

Comments from respondents this month were typified by responses from the chemical industry indicating that demand for members' products is strong, but profitability is being squeezed by energy prices. The electronics industry appears to be slowing as several respondents indicated a slowing in new orders.

ISM's PMI registered 56.8 percent in October, a decrease of 1.7 percentage points when compared to 58.5 percent in September. ISM's New Orders Index rose 0.2 percentage point from 58.1 percent in September to 58.3 percent in October. ISM's Production Index decreased 2.7 percentage points from 61.6 percent in September to 58.9 percent in October. The ISM Employment Index is at 54.8 percent for October, a decrease of 3.3 percentage points when compared to the 58.1 percent reported in September.

ISM's Supplier Deliveries Index registered 58.6 percent, 1 percentage point lower than September's 59.6 percent. ISM's Inventories Index registered 48.2 percent in October, down from the 51 percent reported in September. ISM's Customers' Inventories Index for October is at 43.5 percent, an increase of 2 percentage points compared to the September reading of 41.5 percent. ISM's Prices Index in October is 78.5 percent, 2.5 percentage points higher than the 76 percent reported in September.

ISM's Backlog of Orders Index for October declined 6 percentage points to 49 percent from 55 percent registered in September. ISM's New Export Orders Index registered 56.6 percent, a decrease of 4.8 percentage points from September's 51.8 percent. ISM's Imports Index increased 2.7 percentage points to 58.5 percent in October, up from 55.8 percent in September.

"October continued a trend of slower growth, but that should be somewhat expected as manufacturing has experienced three quarters of strong growth so far this year. The decline in order backlogs is an indication that manufacturing has peaked, and some sectors are seeing this more than others. Concerns over recent inventory growth would seem to be offset by October's decline in inventories and the expectations that customer inventories are still too low," said Ore.

In October, 15 industries reported growth: Miscellaneous*; Food; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Apparel; Instruments & Photographic Equipment; Paper; Printing & Publishing; Furniture; Chemicals; Rubber & Plastic Products; Electronic Components & Equipment; Transportation & Equipment; Glass, Stone & Aggregate; and Textiles.

"ABS; Aluminum; Aluminum Extrusions; Aluminum Products; Benzene; Caustic Soda; Chemicals; Coal; Copper; Copper Products; Corrugated; Crude Oil; Diesel Fuel / Fuel Oil; Electricity; Energy; Freight; Gasoline; HDPE; Latex; LDPE; Lumber; Machine Parts; Molded Plastic Components; Natural Gas; Nickel; Oil; Packaging; Paper; PET; Plastic Products (various forms); Plastic Resins; Plastics; Polyethylene; Polypropylene; Polypropylene Resin; Propylene; Resin; Stainless Steel; Stainless Steel Products (various forms); Steel; and Steel Products (various forms) are the commodities reported up in price. The commodities reported down in price are Corn and Cotton. The commodities listed in short supply are C5 Resin; Caustic Soda; Maleic Anhydride; Stainless Steel; Steel; and Steel Products (various forms)," Ore stated.

OCTOBER 2004 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
October vs September
Rate of Change
October vs September
PMI 56.8 Growing Slower
New Orders 58.3 Growing Faster
Production 58.9 Growing Slower
Employment 54.8 Growing Slower
Supplier Deliveries 58.6 Slowing Slower
Inventories 48.2 Contracting From Growing
Customers' Inventories 43.5 Too Low Slower
Prices 78.5 Increasing Faster
Backlog of Orders 49.0 Contracting From Growing
New Export Orders 56.6 Growing Faster
Imports 58.5 Growing Faster

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

PMI

The PMI indicates that the manufacturing economy grew in October for the 17th consecutive month. The PMI for October registered 56.8 percent, a decrease of 1.7 percentage points when compared to the September reading of 58.5 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 42.8 percent, over a period of time, generally indicates an expansion of the overall economy. The October 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 October (61 percent) corresponds to a 6.6 percent increase in real gross domestic product (GDP). In addition, if the PMI for October (56.8 percent) is annualized, this corresponds to a 5.1 percent increase in GDP.

Month Oct'04 Sep'04 Aug'04 Jul'04 Jun'04
PMI% 56.8 58.5 59.0 62.0 61.1
Month May'04 Apr'04 Mar'04 Feb'04 Jan'04
PMI% 62.8 62.4 62.5 61.4 63.6
Month Dec'03 Nov'03 Oct'03 Sep'03 Aug'03
PMI% 63.4 61.3 57.1 54.7 55.0

New Orders

ISM's New Orders Index grew in October with a reading of 58.3 percent. The index is 0.2 percentage point higher than the 58.1 percent registered in September, and it is the 18th 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). Ten industries reported increases for the month of October: Miscellaneous*; Furniture; Food; Chemicals; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Printing & Publishing; Electronic Components & Equipment; and Glass, Stone & Aggregate.

New
Orders
%
Better
%
Same
%
Worse

Net

Index
October 2004 27 56 17 +10 58.3
September 2004 31 54 15 +16 58.1
August 2004 36 47 17 +19 61.2
July 2004 36 51 13 +23 64.7

Production

ISM's Production Index is 58.9 percent in October, 2.7 percentage points lower than the 61.6 percent reported in September. October is the 18th 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 October, 15 registered growth: Miscellaneous*; Paper; Food; Apparel; Printing & Publishing; Instruments & Photographic Equipment; Wood & Wood Products; Chemicals; Glass, Stone & Aggregate; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Textiles; Furniture; and Rubber & Plastic Products.


Production
%
Better
%
Same
%
Worse

Net

Index
October 2004 29 56 15 +14 58.9
September 2004 33 57 10 +23 61.6
August 2004 32 51 17 +15 59.5
July 2004 34 55 11 +23 66.1

Employment

ISM's Employment Index grew for the 12th consecutive month, following a 37-month trend of contraction. The index registered 54.8 percent in October compared to 58.1 percent in September, a decrease of 3.3 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 nine industries reporting growth in employment during October are: Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Food; Wood & Wood Products; Electronic Components & Equipment; Miscellaneous*; Furniture; Instruments & Photographic Equipment; and Textiles.


Employment
%
Higher
%
Same
%
Lower

Net

Index
October 2004 20 66 14 +6 54.8
September 2004 26 60 14 +12 58.1
August 2004 24 61 15 +9 55.7
July 2004 25 65 10 +15 57.3

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 34th consecutive month in October. ISM's Supplier Deliveries Index for October registered 58.6 percent, a decrease of 1 percentage point compared to September's reading of 59.6 percent. A reading above 50 percent indicates slower deliveries. The 12 industries reporting slower supplier deliveries in October are: Apparel; Paper; Printing & Publishing; Textiles; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Rubber & Plastic Products; Transportation & Equipment; Chemicals; Food; Primary Metals; and Fabricated Metals.

Supplier
Deliveries
%
Slower
%
Same
%
Faster

Net

Index
October 2004 24 70 6 +18 58.6
September 2004 23 73 4 +19 59.6
August 2004 31 66 3 +28 63.2
July 2004 35 61 4 +31 64.2

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

Inventories

Manufacturers' inventories declined slightly in October as ISM's Inventories Index registered 48.2 percent, a decrease of 2.8 percentage points when compared to September's 51 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 five industries reporting higher inventories in October are: Miscellaneous*; Wood & Wood Products; Food; Textiles; and Electronic Components & Equipment.


Inventories
%
Higher
%
Same
%
Lower

Net

Index
October 2004 17 61 22 -5 48.2
September 2004 20 63 17 +3 51.0
August 2004 23 61 16 +7 51.7
July 2004 17 63 20 -3 49.9

Customers' Inventories**

The October Customers' Inventories Index is at 43.5 percent, an increase of 2 percentage points compared to the September reading of 41.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 41st consecutive month that the index has registered below 50 percent. Four industries reported higher customer inventories during October and they are: Electronic Components & Equipment; Furniture; Paper; and Food.

Customers'
Inventories
%
Reporting
% Too
High
% About
Right
% Too
Low

Net

Index
October 2004 72 10 67 23 -13 43.5
September 2004 71 8 67 25 -17 41.5
August 2004 73 11 69 20 -9 45.5
July 2004 76 6 63 31 -25 37.5

Prices**

ISM's Prices Index indicates manufacturers continued to pay higher prices in October. This is the 32nd consecutive month the index has registered higher prices. October's index is at 78.5 percent, 2.5 percentage points higher than September's reading of 76 percent. During October, 61 percent of supply executives reported paying higher prices and 4 percent reported paying lower prices, while 35 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. Seventeen industries reported paying higher prices in October: Tobacco; Glass, Stone & Aggregate; Textiles; Primary Metals; Paper; Chemicals; Instruments & Photographic Equipment; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Printing & Publishing; Food; Miscellaneous*; Fabricated Metals; Furniture; and Wood & Wood Products.


Prices
%
Higher
%
Same
%
Lower

Net

Index
October 2004 61 35 4 +57 78.5
September 2004 55 42 3 +52 76.0
August 2004 67 29 4 +63 81.5
July 2004 58 38 4 +54 77.0

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 49 percent, indicating manufacturers' backlogs in October contracted when compared to September. Of the 87 percent of respondents who report their backlog of orders, 20 percent reported greater backlogs, 22 percent reported smaller backlogs, and 58 percent reported no change from September. The five industries reporting an increase in order backlogs during the month are: Wood & Wood Products; Miscellaneous*; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; and Chemicals.

Backlog
of Orders
%
Reporting
%
Greater
%
Same
%
Less

Net

Index
October 2004 87 20 58 22 -2 49.0
September 2004 89 28 54 18 +10 55.0
August 2004 89 29 52 19 +10 55.0
July 2004 87 32 52 16 +16 58.0

New Export Orders

ISM's New Export Orders Index for October registered 56.6 percent, an increase of 4.8 percentage points when compared to September's index of 51.8 percent. This is the 23rd consecutive month of growth in export orders. The 11 industries reporting growth in new export orders in October are: Miscellaneous*; Paper; Printing & Publishing; Primary Metals; Instruments & Photographic Equipment; Fabricated Metals; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Food; Electronic Components & Equipment; and Rubber & Plastic Products.

New Export
Orders
%
Reporting
%
Better
%
Same
%
Worse

Net

Index
October 2004 77 15 80 5 +10 56.6
September 2004 78 12 81 7 +5 51.8
August 2004 76 19 72 9 +10 54.2
July 2004 77 19 75 6 +13 56.2

Imports

Imports of materials by manufacturers grew during October as the Imports Index registered 58.5 percent. The index rose 2.7 percentage points when compared to September's index of 55.8 percent, indicating a faster rate of growth. The nine industries reporting growth in import activity for October are: Furniture; Apparel; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Primary Metals; Fabricated Metals; Transportation & Equipment; Miscellaneous*; and Paper.


Imports
%
Reporting
%
Higher
%
Same
%
Lower

Net

Index
October 2004 79 21 72 7 +14 58.5
September 2004 79 23 72 5 +18 55.8
August 2004 78 23 71 6 +17 59.2
July 2004 79 23 72 5 +18 59.9

*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 decreased 6 days to 104 days. Average leadtime for Production Materials increased 3 days to 50 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies increased 3 days to 23 days.

  Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
October 2004 24 11 11 21 25 8 104
September 2004 23 8 15 18 27 9 110
August 2004 26 11 13 21 22 7 96
July 2004 24 8 14 21 25 8 105
Production Materials              
October 2004 21 37 26 11 3 2 50
September 2004 24 39 22 11 2 2 47
August 2004 24 39 22 10 4 1 46
July 2004 20 45 21 10 3 1 45
MRO Supplies              
October 2004 50 37 11 1 1 0 23
September 2004 58 31 10 0 1 0 20
August 2004 52 36 8 3 1 0 23
July 2004 53 36 8 2 1 0 22

In Short Supply

C5 Resin; Caustic Soda — 2nd month; Maleic Anhydride; Stainless Steel — 10th month; Steel — 10th month; and Steel Products (various forms) — 4th month.

Up in Price

ABS — 2nd month; Aluminum — 12th month; Aluminum Extrusions — 3rd month; Aluminum Products; Benzene; Caustic Soda — 6th month; Chemicals — 9th month; Coal; Copper; Copper Products — 3rd month; Corrugated — 9th month; Crude Oil; Diesel Fuel / Fuel Oil — 2nd month; Electricity — 2nd month; Energy — 10th month; Freight — 8th month; Gasoline — 10th month; HDPE — 2nd month; Latex — 3rd month; LDPE; Lumber — 6th month; Machine Parts; Molded Plastic Components; Natural Gas — 27th month; Nickel; Oil — 2nd month; Packaging — 5th month; Paper — 8th month; PET; Plastic Products (various forms) — 9th month; Plastic Resins — 3rd month; Plastics — 3rd month; Polyethylene — 2nd month; Polypropylene — 3rd month; Polypropylene Resin — 2nd month; Propylene; Resin — 3rd month; Stainless Steel — 2nd month; Stainless Steel Products (various forms) — 4th month; Steel — 13th month; and Steel Products (various forms) — 3rd month.

Down in Price

Corn — 3rd month; and Cotton.

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 November 2004 data will be released at 10:00 a.m. (ET) on December 1, 2004.



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