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65th Semiannual Economic Forecast

FOR RELEASE: May 20, 2003

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
Expect Recovery to Continue in Second Half of 2003 Say Purchasing and Supply Executives
Manufacturing Forecast Revenue Growth of 1.9%
Capacity Utilization 79%
Non-Manufacturing Forecast Revenue Growth of 5.4%
Capacity Utilization 84.2%

(Nashville, TN) — Economic growth will continue in the second half of 2003, say the nation's purchasing and supply executives in their 65th Semiannual Forecast. The ISM forecast provides insight into both the manufacturing and non-manufacturing sectors of the U.S. economy.

These projections are part of the forecast issued by the Business Survey Committees of the Institute for Supply Management™ (ISM). The forecast was presented today by Norbert J. Ore, C.P.M., chair of the ISM Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation, and Ralph G. Kauffman, Ph.D., C.P.M., chair of the ISM Non-Manufacturing Business Survey Committee and coordinator of the purchasing and supply management program, University of Houston-Downtown.

Manufacturing Summary

Purchasing and supply executives expect their 2003 revenues to grow modestly from 2002 as they now anticipate 1.9 percent growth in revenues. Manufacturing industries expecting the greatest improvement over 2002 are — listed in order — Paper; Chemicals; Food; Transportation & Equipment; Wood & Wood Products; Electronic Components & Equipment; Textiles; Instruments & Photographic Equipment; and Rubber & Plastic Products.

"Manufacturing purchasing and supply executives are more optimistic with regard to the economy, and see improvement in their organizations' prospects for the balance of 2003," said Ore. "While the manufacturing sector's expectations that second half improvement should overcome the major concern of a weak economy, members' additional concerns are: labor and benefits costs, including healthcare costs; effects of war and geopolitical concerns; energy costs; and inflation and interest rates. Capacity utilization below 80 percent discourages capital investment and is reflected in revised spending plans that now predict a decline in year-over-year capital spending."

In the sector, purchasers report operating at 79 percent of their normal capacity, down marginally from 79.2 percent reported in December 2002. They now predict that capital expenditures will decrease 3.1 percent in 2003 compared to the December 2002 prediction of a 4.6 percent increase. Purchasers also forecast that they will continue to reduce their organization's purchased inventory-to-sales ratio. They expect manufacturing employment to decline an additional 0.5 percent. They also forecast an average 2.3 percent increase in overall labor and benefits costs for 2003. Manufacturing purchasers are predicting growth in exports and imports at slightly decelerating rates from their forecast in December 2002, and expect the U.S. dollar to remain strong against the currencies of major trading partners. They predict the prices they pay will decrease 0.3 percent from the present until the end of 2003.

Non-Manufacturing Summary

Fifty-eight percent of non-manufacturing purchasing and supply executives expect their 2003 revenues to be greater than in 2002. They currently expect a 5.4 percent net increase in overall revenues compared to a 0.9 percent increase reported for 2002. Non-manufacturing industries expecting the greatest improvement over 2002 are — listed in order — Real Estate; Transportation; Other Services**; Business Services; Insurance; Finance & Banking; and Retail Trade.

"Non-manufacturing purchasers report operating at 84.2 percent of their normal capacity, slightly above the 83.9 percent reported in December 2002, but are less optimistic about the next 12 months than in either May or December 2002," said Kauffman. "While they forecast that their capacity to produce products and provide services will rise by 2.3 percent during 2003, capital expenditures are expected to rise only 1.2 percent above the 2002 level. This is a reversal from the 0.4 percent decrease in 2003 capital spending predicted in December 2002. Non-manufacturers also predict that their employment will drop by 0.5 percent during the remaining months of 2003. Their major economic concerns are: a weak economy; labor and benefit costs, including healthcare costs; effects of war and geopolitical concerns; inflation; and government budgets and funding."

Purchasers in non-manufacturing industries expect that the prices they pay for materials and services will increase by 1.2 percent during 2003, a somewhat higher rise than the 0.5 percent increase reported for 2002. They also forecast a 2.1 percent increase in their overall labor and benefit costs for 2003. Profit margins are reported to have increased in the period since November 2002, and members expect them to rise additionally in the remaining months of 2003. Members indicate that they have achieved an average 52 percent of potential benefits from application of technology to supply chains and that electronic commerce is their number one means of improving supply chains in 2003. Overall, they expect business in the first half of 2003 to be better than the second half of 2002, and the second half of 2003 to be better than the first half of this year.


Operating Rate

Manufacturing

Purchasing and supply executives report that their companies are currently operating at 79 percent of normal capacity. The decrease from 79.2 percent reported in December 2002 is an indication that a turnaround in manufacturing has yet to begin. This is consistent with the decline that we have seen in the sector as reported in the ISM Manufacturing Report On Business® for the months of March and April 2003. The following industries are operating at capacity levels above 80 percent: Paper; Wood & Wood Products; Instruments & Photographic Equipment; Glass, Stone, & Aggregate; Apparel; Textiles; Chemicals; Food; and Printing & Publishing.

Non-Manufacturing

Non-manufacturing purchasing and supply executives report that their organizations are currently operating at 84.2 percent of normal capacity. This is slightly higher than the 83.9 percent reported in December 2002, but slightly lower than the 85.6 percent reported in May 2002. Considering production capacity increases reported in the following section of this forecast, this indicates that non-manufacturing industries are continuing to add capacity and to employ it at a slightly higher rate. The following industries are operating at capacity levels above 80 percent: Real Estate; Public Administration; Insurance; Transportation; Finance & Banking; Other Services**; Agriculture; Entertainment; Mining; Retail Trade; Utilities; Health Services; and Communication.

Operating Rate
  Manufacturing Non-Manufacturing
  May 2002 Dec 2002 May 2003 May 2002 Dec 2002 May 2003
90%+ 29% 32% 35% 54% 49% 46%
50%-89% 67% 65% 59% 45% 48% 53%
Below 50% 4% 3% 6% 1% 3% 1%
Est. Overall Average 79.3% 79.2% 79% 85.6% 83.9% 84.2%


Production Capacity — 2003 Compared to End of 2002

Manufacturing

Production capacity in manufacturing is expected to increase 1.9 percent in 2003, somewhat less than the 3.7 percent predicted in December 2002. This reflects the continuing stagnation in the sector as 31 percent reported an average capacity increase of 10.7 percent, 12 percent reported decreases averaging 12 percent, and 57 percent reported no change. The industries reporting expected production capacity increases above 2 percent are: Transportation & Equipment; Miscellaneous*; Wood & Wood Products; Apparel; Food; Chemicals; and Rubber & Plastic Products.

The principal means of achieving increases in production capacity in 2003 are (in order of importance):

  1. Additional personnel (permanent, temporary, or contract)
  2. Additional plant and/or equipment
  3. More hours worked with existing personnel
  4. Replace equipment with technically advanced equipment
  5. More shifts worked with existing personnel
Manufacturing Production Capacity
  For 2002 For 2003 For 2003
  Reported
Dec 2002
Magnitude
of Change
Predicted
Dec 2002
Magnitude
of Change
Predicted
May 2003
Magnitude
of Change
Higher 37% +11.2% 44% +10.6% 31% +10.7%
Same 45% NA 44% NA 57% NA
Lower 18% -15.2% 12% -8.3% 12% -12%
Net Average   +1.4%   +3.7%   +1.9%

Non-Manufacturing

The capacity to produce products or provide services in the non-manufacturing sector is expected to increase 2.3 percent during 2003. This compares to an increase of 2 percent reported for 2002 and a prediction in December 2002 of a 4.6 percent increase in 2003. For 2003, 28 percent of non-manufacturing purchasers expect their capacity to increase by an average of 11.1 percent, and 8 percent of respondents foresee their capacity decreasing by an average of 9.3 percent. Sixty-four percent expect no change in their capacity. The industries expecting to add more than 3 percent to their capacity are: Transportation; Communication; Real Estate; Other Services**; and Retail Trade.

The principal means of achieving increases in production or provision capacity in 2003 are (in order of importance):

  1. Additional personnel (permanent, temporary, or contract)
  2. Additional plant or equipment
  3. Replace equipment with technically advanced equipment
  4. More hours worked with existing personnel
  5. More shifts worked with existing personnel
Non-Manufacturing Production or Provision Capacity
  For 2002 For 2003 For 2003
  Reported
Dec 2002
Magnitude
of Change
Predicted
Dec 2002
Magnitude
of Change
Predicted
May 2003
Magnitude
of Change
Higher 30% +15.6% 47% +12.2% 28% +11.1%
Same 54% NA 48% NA 64% NA
Lower 16% -16.6% 5% -20.3% 8% -9.3%
Net Average   +2.0%   +4.6%   +2.3%


Predicted Capital Expenditures — 2003 vs. 2002

Manufacturing

Purchasers expect a 3.1 percent decrease in capital expenditures in 2003. This is a reversal from the December 2002 forecast when members predicted a 4.6 percent increase for 2003. Currently, 23 percent of purchasers predict increased capital expenditures in 2003 with an average increase of 36.7 percent, while 36 percent said their capital spending will decline at an average decrease of 31.7 percent. Forty-one percent said they plan to spend the same as in 2002. Industries expecting an increase in capital expenditures in 2003 are: Paper; Food; Fabricated Metals; Leather; Printing & Publishing; Apparel; and Instruments & Photographic Equipment.

Non-Manufacturing

Non-manufacturing purchasing and supply executives are expecting to increase their level of capital expenditures in 2003 compared to 2002 by 1.2 percent. This is a reversal of both the 0.4 percent decrease predicted in December 2002 and the 2.6 percent decrease reported in December for 2002. The 32 percent of members expecting to spend more predict an average increase of 26.2 percent. An additional 34 percent anticipate a decrease averaging 20.7 percent. However, 34 percent expect to spend the same on capital expenditures in 2003 as in 2002. Industries expecting increases in capital expenditures in 2003 are: Real Estate; Insurance; Mining; Utilities; Construction; Transportation; and Retail Trade.

Predicted Capital Expenditures 2003 vs. 2002
  Manufacturing Non-Manufacturing
  Predicted
Dec 2002
Predicted
May 2003
Magnitude
of Change
Predicted
Dec 2002
Predicted
May 2003
Magnitude
of Change
Higher 38% 23% +36.7% 38% 32% +26.2%
Same 35% 41% NA 29% 34% NA
Lower 27% 36% -31.7% 33% 34% -20.7%
Net Average +4.6%   -3.1% -0.4%   +1.2%


Prices — Changes Between End of 2002 and April 2003

Manufacturing

In the December 2002 forecast, purchasers expected an increase of 0.5 percent in prices paid during the first four months of 2003. That has now been validated as they report a 0.2 percent increase in prices paid for the period. The 43 percent who say their prices are higher now than at the end of 2002 report an average increase of 5 percent, while the 30 percent who report lower prices averaged 6.4 percent and the remaining 27 percent indicate no change. Industries predicting increases in prices paid for the first part of 2003 are: Chemicals; Textiles; Rubber & Plastic Products; Leather; Food; Miscellaneous*; Paper; Primary Metals; Glass, Stone, & Aggregate; and Wood & Wood Products.

Non-Manufacturing

Non-manufacturing members report that their purchases in the first four months of this year cost an average of 0.4 percent more than they would have at the end of 2002. This is less than the 0.7 percent increase in prices predicted for this same period in December 2002. Forty-six percent of non-manufacturing purchasers reported the prices they paid increased an average of 4 percent in the first part of 2003. Also, 18 percent anticipate price decreases averaging 8.3 percent. The remaining 36 percent indicate no change in prices in the first four months of 2003. Industries reporting the largest increase in prices they paid in the first part of 2003 are: Agriculture; Wholesale Trade; Transportation; Real Estate; Insurance; and Health Services.

Prices — Changes Between End of 2002 and April 2003
  Manufacturing Non-Manufacturing
  Predicted
Dec 2002
Reported
May 2003
Magnitude
of Change
Predicted
Dec 2002
Reported
May 2003
Magnitude
of Change
Higher 38% 43% +5.0% 47% 46% +4.0%
Same 28% 27% NA 36% 36% NA
Lower 34% 30% -6.4% 17% 18% -8.3%
Net Average +0.5%   +0.2% +0.7%   +0.4%


Prices — Predicted Changes Between End of 2002 and End of 2003

Manufacturing

When asked to predict 2003 price changes, 49 percent of purchasers expect prices they pay to increase by 4.6 percent for the entire year. At the same time, 35 percent anticipate decreases averaging 6.8 percent. Including the 16 percent who expect no change in prices, purchasers expect net average prices to decrease 0.1 percent for 2003, less than the December 2002 prediction of a 1.8 percent increase. Industries predicting 1 percent or greater increases in prices for all of 2003 are: Chemicals; Textiles; Leather; Rubber & Plastic Products; Paper; Miscellaneous*; Wood & Wood Products; and Food.

Non-Manufacturing

Looking out to the end of 2003, non-manufacturing purchasers expect prices they pay to increase by 1.2 percent over the entire year. Fifty-four percent of purchasers anticipate price increases averaging 4.7 percent. Eighteen percent of purchasers expect decreased prices with an average reduction of 7.6 percent, and 28 percent of members do not expect prices to change. Industries expecting the highest rates of price increases in 2003 are: Insurance; Wholesale Trade; Transportation; Entertainment; Health Services; Public Administration; and Construction.

Prices — Predicted Changes Between End of 2002 and End of 2003
  Manufacturing Non-Manufacturing
  Predicted
Dec 2002
Predicted
May 2003
Magnitude
of Change
Predicted
Dec 2002
Predicted
May 2003
Magnitude
of Change
Higher 50% 49% +4.6% 59% 54% +4.7%
Same 20% 16% NA 23% 28% NA
Lower 30% 35% -6.8% 18% 18% -7.6%
Net Average +1.8%   -0.1% +0.9%   +1.2%


Profit Margins

Manufacturing

For the fourth quarter of 2002 and the first quarter of 2003, 26 percent of respondents report increased profit margins, 37 percent report lower, and 37 percent indicate no change. However, profitability in manufacturing will improve for the balance of the year according to purchasing and supply executives. When asked to forecast the balance of 2003, purchasers are more bullish as 44 percent predict higher profit margins, 18 percent predict lower, and 38 percent expect no change. Industries expecting higher margins between the end of April and the end of 2003 are: Textiles; Industrial & Commercial Equipment & Computers; Paper; Instruments & Photographic Equipment; Chemicals; Apparel; Transportation & Equipment; Food; Glass, Stone, & Aggregate; Fabricated Metals; Miscellaneous*; Electronic Components & Equipment; and Wood & Wood Products.

Non-Manufacturing

Non-manufacturing purchasing and supply executives were asked about changes in profit margins that their organizations recently experienced or were expecting in the near future. Their response indicated that 32 percent experienced an increase in profit margins during the November 2002 to April 2003 period, while 28 percent found smaller profit margins and 40 percent had no change in margins during the same period. Looking ahead over the balance of 2003, 48 percent of supply managers expect improved margins, only 19 percent expect lower profit margins, and the remaining 33 percent of members anticipate no change in their profit margins. Industries expecting the greatest increase in profit margins during the remainder of 2003 are: Transportation; Insurance; Mining; Entertainment; Utilities; Wholesale Trade; and Retail Trade.

Profit Margins
  Manufacturing Non-Manufacturing
  Nov 2002 - April 2003
Reported May 2003
April 2003 - Dec 2003
Predicted May 2003
Nov 2002 - April 2003
Reported May 2003
April 2003 - Dec 2003
Predicted May 2003
Better 26% 44% 32% 48%
Same 37% 38% 40% 33%
Worse 37% 18% 28% 19%
Diffusion Index 44.5% 63% 52% 64.5%


Labor and Benefit Costs — Predicted Rate Change End of 2002 vs. End of 2003

Manufacturing

Expectations for change in overall labor and benefit costs for 2003 are slightly lower than predicted in December 2002 for 2003. Sixty-nine percent of members who expect increased labor and benefit costs predict growth to average 3.8 percent for all of 2003, while the 6 percent forecasting lower costs see them decreasing by an average 6 percent. Including the 25 percent who believe costs will remain unchanged, the expected overall net rate of increase is 2.3 percent between the end of 2002 and the end of 2003. Industries expecting labor and benefits costs to rise 2 percent or higher are: Fabricated Metals; Paper; Miscellaneous*; Wood & Wood Products; Instruments & Photographic Equipment; Apparel; Leather; Transportation & Equipment; Electronic Components & Equipment; and Chemicals.

Non-Manufacturing

Purchasing and supply executives' expectations for change in labor and benefit costs for non-manufacturing industries in 2003 — an increase of 2.1 percent — are higher than the 1.1 percent increase they predicted in December 2002. Sixty-four percent of respondents expect such costs to increase by an average 4.5 percent. Another 11 percent of purchasers expect labor and benefit costs to shrink by an average 7.4 percent, and 25 percent believe costs will remain stable during 2003. Industries expecting the largest increases in labor and benefit costs in 2003 over 2002 are: Entertainment; Public Administration; Insurance; Health Services; Retail Trade; Construction; and Wholesale Trade.

Labor and Benefit Costs — Predicted Rate Change End of 2002 vs. End of 2003
  Manufacturing Non-Manufacturing
  Predicted
Dec 2002
Predicted
May 2003
Magnitude
of Change
Predicted
Dec 2002
Predicted
May 2003
Magnitude
of Change
Higher 78% 69% +3.8% 63% 64% +4.5%
Same 16% 25% NA 28% 25% NA
Lower 6% 6% -6.0% 9% 11% -7.4%
Net Average +2.6%   +2.3% +1.1%   +2.1%


Employment

Change in Overall Employment — Balance 2003

Manufacturing

Consistent with the December 2002 forecast, ISM's Manufacturing Business Survey Committee members continue to predict that manufacturing employment will decline. Respondents estimate a decrease of 0.5 percent for the balance of 2003, with 20 percent expecting employment to be 7.8 percent higher. This is compared to the 26 percent who predict employment to be lower by 7.7 percent. The remaining 54 percent of members expect their employment levels to be unchanged for the balance of 2003. Industries anticipating the greatest reduction in their employment in the coming months of 2003 are: Furniture; Rubber & Plastic Products; Primary Metals; and Electronic Components & Equipment.

Non-Manufacturing

ISM's Non-Manufacturing Business Survey Committee members report that non-manufacturing employment has decreased 1.4 percent since November 2002. They forecast that employment will decrease an additional 0.5 percent during the balance of 2003. For the remaining months of 2003, 24 percent expect higher levels of employment, 32 percent of members anticipate lower levels, and 44 percent expect their employment levels to be unchanged. Industries anticipating the greatest reduction in their employment in the coming months of 2003 are: Agriculture; Communication; Entertainment; Public Administration; Utilities; and Real Estate.

Predicted Change in Overall Employment
  Manufacturing Non-Manufacturing
  Predicted for 2003
Dec 2002
Balance of 2003
May 2003
Nominal
Change
Predicted for 2003
Dec 2002
Balance of 2003
May 2003
Nominal
Change
Higher 29% 20% +7.8% 32% 24% +6.6%
Same 37% 54% NA 46% 44% NA
Lower 34% 26% -7.7% 22% 32% -6.6%
Net Average -0.6%   -0.5% +0.2%   -0.5%


Restructuring and Employment Changes

Manufacturing

Some employment changes resulting from organizational restructuring are expected during the balance of 2003. Overall, 29 percent said restructuring would reduce their employment (27 percent moderate decrease and 2 percent substantial decrease). While 5 percent anticipate restructuring to increase their employment (4 percent moderate increase and 1 percent substantial increase), 66 percent indicated no employment change from restructuring during the balance of 2003. The industries expecting reductions in employment as a result of restructuring are: Paper; Furniture; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Fabricated Metals; Textiles; Chemicals; Primary Metals; Miscellaneous*; Electronic Components & Equipment; Wood & Wood Products; Instruments & Photographic Equipment; Printing & Publishing; Transportation & Equipment; and Food.

Non-Manufacturing

Non-manufacturing purchasers expect a net overall reduction of employees to be the result of organizational restructuring for the balance of 2003. Thirty-four percent indicated that restructuring would reduce employment (32 percent moderate decrease and 2 percent substantial decrease). Eleven percent expect restructuring to increase employment (10 percent moderate increase and 1 percent substantial increase), while 55 percent expect no change to employment as a result of organizational restructuring during the remainder of 2003. The industries expecting the greatest reductions as a result of restructuring are: Mining; Utilities; Transportation; Real Estate; Insurance; and Communication.

Restructuring and Employment Changes
  Manufacturing Non-Manufacturing
  Balance of 2002
May 2002
Balance of 2003
May 2003
Balance of 2002
May 2002
Balance of 2003
May 2003
Substantial Increase 1% 1% 1% 1%
Moderate Increase 7% 4% 12% 10%
No Change 62% 66% 66% 55%
Moderate Decrease 28% 27% 19% 32%
Substantial Decrease 2% 2% 2% 2%
Diffusion Index 39% 38% 46% 38.5%


Export Business — Predicted Change for Next Half Year (Second half of 2003)

Manufacturing

The responses for this semiannual report indicate purchasers are optimistic about new export orders for the second half of 2003. Of the 78 percent of members who export, 45 percent predict an increase (41 percent moderate increase and 4 percent substantial increase) over the next half year, which is less than the 49 percent in ISM's December 2002 forecast. Presently, 9 percent (9 percent moderate decrease, 0 percent substantial decrease) see a decrease in their exports and 46 percent anticipate no change in exports over the next half year. Fourteen industries expect growth in exports: Textiles; Instruments & Photographic Equipment; Food; Furniture; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Miscellaneous*; Electronic Components & Equipment; Apparel; Wood & Wood Products; Chemicals; Rubber & Plastic Products; Fabricated Metals; and Paper.

Non-Manufacturing

For the next half year, non-manufacturing purchasing and supply executives who report that their organizations engage in exporting feel substantially less optimistic than they did in December 2002 concerning their export business. Of the 22 percent of non-manufacturing business survey respondents who report that they export, 9 percent predict an increase (9 percent moderate increase and 0 percent substantial increase ) over the next half year. Twelve percent of members see a decrease in their exports (6 percent moderate decrease and 6 percent substantial decrease), and 79 percent anticipate no change in exports over the next half year. Of the nine industries that report they export, the three industries expecting shrinkage in export business in the second half of 2003 are: Mining; Business Services; and Retail Trade.

Predicted Change in Export Business Next Half Year
  Manufacturing Non-Manufacturing
  First Half of 2003
Predicted Dec 2002
Second Half of 2003
Predicted May 2003
First Half of 2003
Predicted Dec 2002
Second Half of 2003
Predicted May 2003
Substantial Increase 1% 4% 0% 0%
Moderate Increase 48% 41% 38% 9%
No Change 39% 46% 59% 79%
Moderate Decrease 10% 9% 3% 6%
Substantial Decrease 2% 0% 0% 6%
Diffusion Index 68.5% 68% 67.5% 48.5%


Semiannual Forecast Continued...



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