60th Semiannual Economic Forecast (continued)

FOR RELEASE: December 12, 2000

Contact: Kristen Kioa
  NAPM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
OVERALL ECONOMIC GROWTH TO CONTINUE IN 2001

SUPPLY CHAIN PRACTICES IN 2001

Manufacturing

In response to a special question regarding supply chain optimization, 80 percent of purchasing executives plan to take new steps in 2001 to improve their supply chain management practices. Electronic commerce continues at the top of their list. Issues about suppliers (communication, education, certification, early involvement) is the second choice for manufacturers. Inventory initiatives (activities aimed at reducing inventories) are next. ERP and supplier consolidation are the final items listed as issues of concern by purchasers.

  1. Electronic commerce
  2. Supplier Issues (communication, education, certification, early involvement, etc.)
  3. Inventory initiatives
  4. ERP
  5. Supplier Consolidation
Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2001, 73 percent of members stated that they plan to take new steps in 2001 to improve their supply chain management practices. Members indicate a strong preference for application of electronic commerce to the conduct of supply chain activities as the number one means of improvement. Following that preference members indicated other initiatives as listed below:

  1. Electronic commerce
  2. Consolidation of volume with fewer suppliers
  3. Increased application of technology
  4. Improved inventory/logistics management
  5. Process improvements

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers continue to reduce their purchased inventories as has been consistently reported for the last 11 years in the monthly Manufacturing NAPM Report On Business®. In this forecast, 39 percent expect to reduce their purchased inventory-to-sales ratio during 2001. This compares to 11 percent who expect the ratio to grow and 50 percent who predict no change.

Non-Manufacturing

Of the 42 percent of non-manufacturing purchasers who answered this question, 18 percent anticipate reducing their purchased inventory-to-sales ratio during 2001. An additional 15 percent expect their ratio to rise and 67 percent see no change.

Predicted Change in Purchased Inventory-to-Sales Ratio
  Manufacturing Non-Manufacturing
  For 2000
Dec '99
Balance
of 2000
May '00
For 2001
Dec '00
For 2000
Dec '99
Balance
of 2000
May '00
For 2001
Dec '00
Greater 14% 10% 11% 20% 11% 15%
Same 61% 54% 50% 64% 69% 67%
Smaller 25% 36% 39% 16% 20% 18%
Diffusion Index 44.5% 37% 36% 52.0% 46.0% 48.5%

Note: A diffusion index above 50 percent would indicate an increase in the inventory-to-sales ratio; below 50 percent, a decrease in the ratio.


EXPECTATIONS FOR HOLIDAY RETAIL SALES

Manufacturing

Each year, we ask purchasers to assess prospects for holiday sales in their geographic area. Compared to 1998 and 1999, prospects don't appear very bright for "good" holiday sales. Over half (54 percent) expect them be "average," while 4 percent expect them to be "poor."

Non-Manufacturing

The outlook for holiday retail sales for 2000 is not as bright as it was a year ago. In assessing prospects for sales in their geographic areas, 46 percent of non-manufacturing members predict sales will be "good," while 4 percent expect them to be "poor," and 50 percent expect them to be "average."

Expectations for Holiday Sales
  Manufacturing Non-Manufacturing
  Dec '98 Dec '99 Dec '00 Dec '98 Dec '99 Dec '00
Good 47% 58% 42% 42% 64% 46%
Average 51% 42% 54% 54% 36% 50%
Poor 2% 0% 4% 4% 0% 4%


ECONOMIC CONCERNS

Manufacturing

Energy is the number one concern of purchasers in the year ahead. Concern about a weak economy was mentioned almost as often as energy, while labor and benefit costs, interest rates, and inflation made the list, but were of lesser concern for 2001.

Economic Concerns

  1. Energy
  2. Weak economy
  3. Labor and benefit costs
  4. Interest rates
  5. Inflation
Non-Manufacturing

The number one economic concern of non-manufacturing purchasing executives in late 2000 is increased costs and inflation. That is followed by labor and benefit costs. Other concerns include: higher interest rates, labor availability, the U.S. economy, material shortages, and government regulation/deregulation.

Economic Concerns

  1. Increased costs, inflation
  2. Labor and benefit costs
  3. Higher interest rates
  4. Labor availability
  5. The U.S. economy

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Members' companies are significantly less optimistic about the next 12 months when compared to their responses for the past year. The 35 percent reporting satisfied/optimistic is the lowest number so reporting since May 1996. The 60 percent who are concerned is up from 39 percent in May 2000, and the 5 percent who indicated worried/pessimistic is the same as in May 2000.

Non-Manufacturing

Non-manufacturing survey members' organizations are slightly less optimistic concerning the next 12 months than they were in May 2000. The proportion who are currently optimistic is 59 percent (63 percent in May), the proportion who are concerned is 38 percent (33 percent in May), and the proportion who are worried or pessimistic is 3 percent (4 percent in May).

Outlook — Next 12 Months
  Manufacturing Non-Manufacturing
  Dec '99 May '00 Dec '00 Dec '99 May '00 Dec '00
Satisfied/Optimistic 62% 56% 35% 60% 63% 59%
Concerned 36% 39% 60% 37% 33% 38%
Worried/Pessimistic 2% 5% 5% 3% 4% 3%


INDUSTRY SPECIFIC QUESTIONS

Manufacturing

U.S. DOLLAR - Predicted Strength vs. Major Trading Currencies — in 2001

Purchasing executives are less optimistic concerning the prospective strength of the U.S. dollar for 2001 relative to major trading currencies than they were in December 1999 for 2000. The average diffusion index for this forecast is 60 percent, compared to 66.1 percent for the May 2000 forecast. Of the ten currencies, none are expected to outperform the dollar.

U.S. Dollar – Predicted Strength vs. Major Trading Currencies 2001
U.S. Dollar Will Be: Euro Can.
$
British
Pound
Deutsch
Mark
Japanese
Yen
French
Franc
Mexican
Peso
Italian
Lira
Korean
Won
Tai.
$
Stronger than 54% 35% 39% 33% 30% 42% 52% 53% 33% 27%
Same as 45% 17% 53% 48% 46% 37% 31% 28% 44% 55%
Weaker than 29% 12% 13% 21% 25% 21% 17% 19% 23% 18%
Diffusion Index 62.5% 61.5% 63% 56% 52.5% 60.5% 67.5% 67.0% 55.0% 54.5%

Note: A diffusion index above 50 percent would predict a generally stronger U.S. dollar; below 50 percent, a generally weaker U.S. dollar, with the distance from 50 percent indicative of the predicted strength or weakness.

Non-Manufacturing

PROFIT MARGINS

Non-manufacturing purchasing executives were asked about changes in profit margins that their organizations may have recently experienced or were expecting in the near future. Their response indicated that 26 percent experienced an increase in profit margins during the second and third quarters of 2000, while 32 percent found smaller profit margins and 42 percent had no change in margins during the same period. Looking ahead over the period December 2000 to April 2001, 38 percent expect improved profit margins, 14 percent expect lower profit margins, and the remaining 48 percent of members anticipate no change in their profit margins over that period of time.

Non-Manufacturing Profit Margins
  Apr '00 thru Sep '00
Reported Dec 2000
Dec'00 thru Apr 2001
Predicted Dec 2000
Improved 26% 38%
No Change 42% 48%
Worse 32% 14%
Diffusion Index 47% 62%

Note: A diffusion index above 50 percent would generally indicate an increase in profit margins; below 50 percent, a decrease in profit margins.


SPECIAL QUESTION

Passing Wage and Commodity Increases to Your Customer

Manufacturing

In response to a special question asking if purchaser's organizations are able to pass through to customers wage and commodity increases that they experience, a substantial 86 percent indicate they are either not able to do so (50 percent), or are able to pass through few increases (36 percent). Only 12 percent indicated that they are able to recover most. Those experiencing no increases and those able to pass through all are definitely not in the mainstream at 1 percent for each category. Compared to the December 1999 survey when this question was first asked, manufacturers are less able to pass through price increases than they were one year ago when 80 percent indicated not able or few.

Non-Manufacturing

Non-manufacturing purchasing executives indicated that they are able to pass through to customers only some of the wage and commodity price increases that they receive. The 25 percent that said they could pass through most or all increases was almost the same as the 26 percent who indicated that ability in May 2000. The 37 percent who indicated they could not pass through any increases or were not experiencing increases compares to 38 percent who reported that condition in May. The remaining 38 percent reported ability to pass through only a few increases (36 percent in May). Thus, conditions for price increase pass-through in non-manufacturing have not changed significantly since May 2000.

Passing Wage and Commodity Increases to Customer
  Manufacturing Non-Manufacturing
  Dec
2000
May
2000
Dec
1999
Dec
2000
May
2000
Dec
1999
Able to pass ALL increases 1% 5% 1% 5% 8% 12%
Able to pass most Increases 12% 13% 16% 20% 18% 24%
Able to pass few increases 36% 41% 38% 38% 36% 30%
Not able to pass increases 50% 40% 43% 36% 34% 36%
Not experiencing increases 1% 1% 2% 1% 4% 3%

Benefits of Applying Technology

Manufacturing

A special question was asked of purchasing executives to determine their progress in achieving efficiency from the application of technology to supply management. While a few companies (5 percent) managed to move rapidly in this direction and are on the final leg, others are making excellent progress (19 percent) and appear poised to benefit from technology. The remaining 76 percent are less than three-fourths complete with almost half of those less than 50 percent finished. It appears that there is still significant efficiency to be gained in this area over the course of the next few years.

Non-Manufacturing

Survey respondents were asked a special question concerning the realized proportion of potential supply chain efficiencies that could ultimately be gained from applying technology to their supply chain. The average response from non-manufacturing members was 57 percent, indicating that, on average, 43 percent of potential improvement is yet to be gained. This compares to 60 percent reported realization in May 2000, implying that as technology is applied, organizations gain additional knowledge of its possibilities and expand their estimates of its potential.

Benefits of Applying Technology
% Benefits
Realized to Date
Manufacturing
% of Responses
Non-Manufacturing
% of Responses
Less than 50 37% 27%
50-74 39% 38%
75-89 19% 29%
90-100 5% 6%


SUMMARY

Manufacturing
  • Operating rate is currently 82.2 percent of normal capacity.
  • Capital expenditures will increase 1.8 percent in 2001.
  • Production capacity will increase 5.3 percent during 2001.
  • Prices manufacturers pay increased 0.6 percent on a weighted average basis in 2000.
  • Overall 2001 prices to remain unchanged from 2000.
  • Labor and benefits costs to increase at a 2.6 percent rate in 2001.
  • Manufacturing employment to decrease 0.5 percent in 2001.
  • The U.S. dollar is expected to remain strong versus major currencies.
  • Exports will continue to grow in 2001.
  • Imports will continue to grow in 2001.
  • Holiday retail sales as viewed by purchasers will be less than robust.
  • Manufacturing revenues (nominal) up by 4 percent in 2000.
  • Manufacturing revenues (nominal) to be up by 4.4 percent in 2001.
  • Major concerns to manufacturers: energy, weak economy, labor and benefit costs, interest rates, and inflation.
  • Overall attitude of manufacturing management — decline in optimism — lowest in 5 years.
Non-Manufacturing
  • Operating rate is currently 87.4 percent of normal capacity.
  • Capital spending to increase 1.5 percent in 2001 over 2000.
  • Production and provision capacity to increase 5.9 percent in 2001.
  • Prices paid increased 2.5 percent during 2000.
  • Prices paid to increase 3.2 percent in 2001.
  • Labor and benefit costs to increase 3.9 percent during 2001.
  • Non-manufacturing employment to increase 2.7 percent in 2001.
  • Exports by non-manufacturing industries to increase during 2001.
  • Imports by non-manufacturing industries to increase during 2001.
  • Holiday retail sales expected to be less strong than in 1999.
  • Non-manufacturing revenues (nominal) to be up by 6.1 percent in 2000.
  • Non-manufacturing revenues (nominal) to be up by 6.9 percent in 2001.
  • Major concerns: increased costs and inflation, labor and benefit costs, and higher interest rates.
  • Non-manufacturing purchasers are mostly optimistic about the next 12 months.
  • Members indicate they are currently realizing about 57 percent of ultimate potential benefits from application of technology to the supply chain.

*Miscellaneous items include: a preponderance of jewelry, toys, sporting goods, and musical instruments.

**Other Services include: hotels, rooming houses, camps, and other lodging places; personal services; automotive repair, services, and parking; miscellaneous repair services; educational services; social services; museums, art galleries, and botanical and zoological gardens; membership organizations; engineering, accounting, research, management, and related services; and miscellaneous services.

In addition to the forecast, the Manufacturing NAPM Report on Business® is issued monthly and is considered by many economists to be the most reliable near-term economic barometer available. It is reviewed regularly by top government agencies and economic business leaders. The report, compiled from responses to questions asked of more than 300 purchasing managers across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies, and prices. The report has been issued by the association since 1931, except during World War II.

The Manufacturing and Non-Manufacturing NAPM Report on Business® is published monthly by the National Association of Purchasing Management, the largest purchasing and supply management research and education organization in the United States. NAPM is comprised of 180 affiliates with more than 45,000 members in the United States.

The full text version of the reports is posted on NAPM's Home Page at www.ism.ws on the first and third business day of every month after 10:10 a.m. (ET)

The next Manufacturing NAPM Report On Business® featuring the December 2000 data will be released at 10:00 a.m. (ET) on Tuesday, January 2, 2001.

The next Non-Manufacturing NAPM Report On Business® featuring the December 2000 data will be released at 10:00 a.m. (ET) on Thursday, January 4, 2001.


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