66th Semiannual Economic Forecast

FOR RELEASE: December 9, 2003

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, ext. 3015

ECONOMIC GROWTH TO CONTINUE IN 2004
Manufacturing Expansion Continues
Revenue to Grow 5.8%
Capital Spending Up 3.2%
Capacity Utilization at 80.1%
Non-Manufacturing to Maintain Strength
Revenue Growth to be 5.7%
Capital Spending Up 7.1%
Capacity Utilization at 85.6%

(New York, NY) — Economic growth in the U.S. will strengthen in 2004, say the nation's purchasing and supply executives in their 66th Semiannual Economic Forecast. Expectations for 2004 are higher in both the manufacturing and non-manufacturing sectors, and both sectors are more optimistic about the coming year than they were one year ago for 2003. The overall prediction is for economic growth to continue at a relatively strong level in 2004.

These projections are part of the forecast issued by the Business Survey Committee 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 by 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 at the University of Houston-Downtown.

Manufacturing Summary

Expectations for 2004 are high as 76 percent of survey respondents expect revenues to be greater in 2004 than in 2003. The panel of purchasing and supply executives expects a 5.8 percent net increase in overall revenues for 2004, compared to an increase of 2.8 percent increase reported for 2003. Manufacturing industries expecting the greatest improvement over 2003 are — listed in order — Electronic Components & Equipment; Transportation & Equipment; Fabricated Metals; Primary Metals; Textiles; Instruments & Photographic Equipment; Furniture; Rubber & Plastic Products; Food; Wood & Wood Products; Glass, Stone, & Aggregate; Printing & Publishing; and Miscellaneous*.

"Manufacturing purchasing and supply executives are optimistic about their organizations' prospects for the first half, and predict additional growth during the second half of 2004," said Ore. "At present, the sector is in the midst of recovery as manufacturing is in its fifth consecutive month of growth as reported in the monthly Manufacturing ISM Report On Business®. Manufacturing seemingly has significant momentum at this point, with near record strength in new orders and production. The manufacturing sector has experienced many challenges as it has grown in 24 out of the 35 months since Y2K."

In the sector, respondents report operating at 80.1 percent of their normal capacity, up slightly from 79 percent reported in May 2003. Purchasing and supply executives predict that capital expenditures will increase 3.2 percent in 2004, compared to the 2.7 percent increase reported for 2003. Survey respondents also forecast that they will continue to reduce their purchased inventory to sales ratio in 2004. Manufacturers have an expectation that employment in the sector will grow by a modest 0.3 percent, while labor and benefits costs are expected to rise an average of 2.7 percent. Manufacturing purchasers are predicting growth in exports and imports, with exports growing at a slightly lower rate compared with imports. They also expect the U.S. dollar to maintain its current positive position against currencies of major trading partners.

They predict the prices they pay will increase 1 percent during the first four months of 2004, and will increase an additional 0.3 percent for the balance of 2004, resulting in only a moderate change in prices during the upcoming year. Respondents' major concerns are inflation, energy costs, health care costs, currency changes, and terrorism / war.

A special question was asked of purchasing and supply executives to determine their progress in achieving efficiency from the application of technology to supply management. While a few companies rate themselves as being almost finished, 84 percent are less than three-fourths complete in achieving efficiency from the application of technology.

Non-Manufacturing Summary

"A significant 67 percent of non-manufacturing purchasing and supply executives expect their 2004 revenues to be greater than in 2003. Overall, respondents currently expect a 5.7 percent net increase in overall revenues compared to a 4.6 percent increase reported for 2003," said Kauffman. Non-manufacturing industries expecting the greatest improvement over 2003 are — listed in order — Business Services; Real Estate; Mining; Entertainment; Retail Trade; and Wholesale Trade.

Non-manufacturing purchasers report operating at 85.6 percent of their normal capacity, above the 84.2 percent reported in May 2003. They also forecast that they will increase their capacity to produce products and provide services by 4.4 percent during 2004. A somewhat slower rate of increase is expected for employment, projected to rise 1.4 percent in 2004. Capital expenditures are anticipated to grow by a significant 7.1 percent, following a 2.2 percent rise reported for 2003. Their major economic concerns are health care costs, inflation, energy costs, terrorism / war, and employment.

Purchasers in non-manufacturing industries predict that the prices they pay for materials and services will increase by a relatively mild 2.1 percent during 2004, up from 0.4 percent reported for 2003. They also forecast a 2.5 percent increase in their overall labor and benefit costs for 2004. They reported increased profit margins in the second and third quarters of 2003 and expect margins to increase more strongly in the first four months of 2004. Members indicate that use of electronic commerce and e-procurement will be their number one means of improving supply chains in 2004. Overall they expect business in the second half of 2004 to be slightly better than the first half, although they look for the first half of 2004 to be better than the second half of 2003.

In response to a special question concerning application of technology, members indicate that approximately 73 percent are less than three-fourths complete in achieving efficiency from the application of technology. Thus there is a significant amount of potential benefits yet to be obtained from additional application of technology.


OPERATING RATE

Manufacturing

Purchasing and supply executives report that their companies are currently operating at 80.1 percent of normal capacity. This is a slight increase from May 2003 (79 percent), and is greater than 80 percent for the first time since December 2000, and this is a difference of 7.3 percentage points when compared to the eight-year high reported in May 2000 (87.4 percent). Recent monthly data from the Manufacturing ISM Report On Business® indicates the manufacturing sector has grown for the past five months, but the impact on capacity utilization appears to be small at this point. The following nine industries are operating at levels above 80.1 percent of capacity: Food; Glass, Stone, & Aggregate; Primary Metals; Printing & Publishing; Wood & Wood Products; Paper; Miscellaneous*; Instruments & Photographic Equipment; and Rubber & Plastic Products.

Non-Manufacturing

Non-manufacturing purchasing and supply executives report that their organizations are currently operating at 85.6 percent of normal capacity. This is somewhat higher than the 84.2 percent reported in May 2003, and above the 83.9 percent reported in December 2002. These increases reflect the steady growth of business activity in the non-manufacturing sector during almost all of 2003. The following industries are operating at the highest levels of capacity: Real Estate; Public Administration; Mining; Finance & Banking; Utilities; and Transportation.

Operating Rate
  Manufacturing Non-Manufacturing
  Dec 2002 May 2003 Dec 2003 Dec 2002 May 2003 Dec 2003
90%+ 32% 35% 34% 49% 46% 53%
50%-89% 65% 59% 62% 48% 53% 46%
Below 50% 3% 6% 4% 3% 1% 1%
Est. Overall Average 79.2% 79% 80.1% 83.9% 84.2% 85.6%


PRODUCTION CAPACITY

Manufacturing

Production capacity in manufacturing increased 1.2 percent in 2003 as 41 percent of purchasing and supply executives reported an average capacity increase of 10.4 percent, 16 percent reported decreases averaging 17.8 percent, and 43 percent reported no change. This compares to a reported capacity increase of 1.2 percent for all of 2003 and a predicted increase of 3.7 percent for 2003 made in December 2002. Expectations for 2004 are for an increase of 3.8 percent. The principal means of achieving increases in production capacity in 2003 were — in order of importance:

  1. More hours worked with existing personnel
  2. Additional plant and/or equipment
  3. Additional personnel (permanent, temporary, or contract)
  4. Replaced equipment with technically advanced equipment
  5. More shifts worked with existing personnel
Manufacturing Production Capacity
  For 2003 For 2003 For 2004
  Predicted
May 2003
Magnitude
of Change
Reported
Dec 2003
Magnitude
of Change
Predicted
Dec 2003
Magnitude
of Change
Higher 31% +10.7% 41% +10.4% 50% +10.9%
Same 57% NA 43% NA 41% NA
Lower 12% -12% 16% -17.8% 9% -18.2%
Net Average   +1.9%   +1.2%   +3.8%


Non-Manufacturing

The capacity to produce products or provide services in the non-manufacturing sector is reported to have increased 3.1 percent during 2003. This compares to a reported rise of 2 percent for 2002. For 2003, 32 percent of non-manufacturing purchasers expect their capacity to increase by an average of 12.8 percent, and 6 percent of respondents foresee their capacity decreasing by an average of 18.9 percent. Including the 62 percent expecting no change in their capacity, an overall net average increase of 3.1 percent is reported for 2003. Capacity is projected to increase by 4.4 percent in 2004. The principal means of achieving increases in production or provision capacity in 2003 were — in order of importance:

  1. Additional personnel (permanent, temporary, or contract)
  2. Replaced equipment with technically advanced equipment
  3. More hours worked with existing personnel
  4. Additional plant and/or equipment
  5. More shifts worked with existing personnel
Non-Manufacturing Production or Provision Capacity
  For 2003 For 2003 For 2004
  Predicted
May 2003
Magnitude
of Change
Reported
Dec 2003
Magnitude
Change
Predicted
Dec 2003
Magnitude
Change
Higher 28% +11.1% 32% +12.8% 41% +12.1%
Same 64% NA 62% NA 57% NA
Lower 8% -9.3% 6% -18.9% 2% -31.0%
Net Average   +2.3%   +3.1%   +4.4%


CAPITAL EXPENDITURES — 2003 vs. 2002

Manufacturing

Purchasing and supply managers report capital expenditures in 2003 rose 2.7 percent when compared to 2002 levels. Though less than robust, the showing for 2003 does exceed our members' expectations as they predicted a decrease of 3.1 percent for 2003 in the May 2003 forecast. The 31 percent of purchasers who reported increased capital expenditures in 2003 indicated an average increase of 30.5 percent, while the 26 percent who said their capital spending was reduced reported an average decrease of 24.9 percent. Forty-three percent said they spent the same in 2003 as in 2002. Industries showing the largest increases in capital expenditures for 2003 — in order of percentage increase — are: Paper; Printing & Publishing; Textiles; Wood & Wood Products; Food; Rubber & Plastic Products; Miscellaneous*; and Instruments & Photographic Equipment.

Non-Manufacturing

Capital expenditures in non-manufacturing organizations in 2003 rose 2.2 percent from the 2002 level. This is greater than the 1.2 percent increase predicted in May 2003 and a turnaround from the 0.4 percent decrease predicted in December 2002. It also is a reversal from the decrease of 2.6 percent reported for 2002 in December 2002. The 40 percent of non-manufacturing purchasing and supply executives who reported an increase in capital expenditures in 2003 indicated an average increase of 21 percent, while the 24 percent who said their capital spending was reduced reported an average decrease of 25.5 percent. Including the 36 percent who said they spent the same as in 2002, the overall net average increase is 2.2 percent. Industries indicating the largest increases — in order of percentage increase — in capital spending in 2003 are: Real Estate; Transportation; Health Services; Entertainment; Communication; and Insurance.

Predicted Capital Expenditures 2003 vs. 2002
  Manufacturing Non-Manufacturing
  Predicted
May 2003
Reported
Dec 2003
Magnitude
of Change
Predicted
May 2003
Reported
Dec 2003
Magnitude
of Change
Higher 23% 31% +30.5% 32% 40% +21.0%
Same 41% 43% NA 34% 36% NA
Lower 36% 26% -24.9% 34% 24% -25.5%
Net Average -3.1%   +2.7% +1.2%   +2.2%


PREDICTED CAPITAL EXPENDITURES — 2004 vs. 2003

Manufacturing

Looking forward to 2004, purchasing and supply executives are expecting slightly better performance in capital expenditures compared to 2003. The 36 percent of members expecting to spend more on capital expenditures in 2004 predict an average increase of 26.9 percent. However, 20 percent expect a decrease averaging 31.9 percent. Considering the 44 percent who expect to spend the same on capital expenditures in both years, the overall net average change forecast for 2004 is an increase of 3.2 percent. Eight of the 20 industries expect higher than average capital expenditures in 2004: Primary Metals; Printing & Publishing; Transportation & Equipment; Glass, Stone, & Aggregate; Wood & Wood Products; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; and Electronic Components & Equipment.

Non-Manufacturing

Looking ahead, non-manufacturing purchasing and supply executives are expecting to strongly increase their level of capital expenditures in 2004 compared to 2003. The predicted increase is 7.1 percent. The 49 percent of members expecting to spend more predict an average increase of 21.3 percent. An additional 17 percent anticipate a decrease averaging 18.4 percent. Considering the 34 percent who expect to spend the same on capital expenditures in 2004 as in 2003, the overall net average change forecast for 2004 is an increase of 7.1 percent. Industries expecting the largest percentage increases — in order of percentage increase — in capital expenditures in 2004 compared to 2003 are: Business Services; Retail Trade; Transportation; Health Services; Utilities; and Entertainment.

Predicted Capital Expenditures 2004 vs. 2003
  Manufacturing Non-Manufacturing
  Predicted
Dec 2003
Magnitude
of Change
Predicted
Dec 2003
Magnitude
of Change
Higher 36% +26.9% 49% +21.3%
Same 44% NA 34% NA
Lower 20% -31.9% 17% -18.4%
Net Average   +3.2%   +7.1%


PRICES — Changes Between End of 2002 and End of 2003

Manufacturing

After an initial forecast in December 2002 of a slight increase in prices paid during 2003, purchasers stated their expectation of a slight decrease (0.1 percent) in ISM's May 2003 report. They now report an expected increase of 0.7 percent for all of 2003. The 43 percent who say their prices are higher now than at the end of 2002 report an average increase of 6.1 percent, while the 37 percent who report lower prices averaged a 5.2 percent decrease. The remaining 20 percent indicate no change for all of 2003.

Manufacturing Price Changes Between End of 2002 and End of 2003
  Predicted
Dec 2002
Magnitude
of Change
Predicted
May 2003
Magnitude
of Change
Reported
Dec 2003
Magnitude
of Change
Higher 50% +6.4% 49% +4.6% 43% +6.1%
Same 20% NA 16% NA 20% NA
Lower 30% -4.6% 35% -6.8% 37% -5.2%
Net Average   +1.8%   -0.1%   +0.7%


Non-Manufacturing

Prices paid by non-manufacturing industries in 2003 are expected to end the year with a modest increase of 0.4 percent compared to their level at the end of 2002. This is a decrease from the 1.2 percent rise predicted in May 2003 and is also a decrease from the 0.9 percent increase predicted for 2003 in December 2002. The 46 percent of non-manufacturing purchasing and supply executives who say their prices are higher now than at the end of 2002 report an average increase of 4.9 percent, while the 26 percent who report lower prices indicate an average decrease of 7.4 percent. After including the 28 percent who indicate no change, the purchasers reported a net average overall price increase of 0.4 percent for all of 2003.

Non-Manufacturing Price Changes Between End of 2002 and End of 2003
  Predicted
Dec 2002
Magnitude
of Change
Predicted
May 2003
Magnitude
of Change
Reported
Dec 2003
Magnitude
of Change
Higher 59% +4.8% 54% +4.7% 46% +4.9%
Same 23% NA 28% NA 28% NA
Lower 18% -10.4% 18% -7.6% 26% -7.4%
Net Average   +0.9%   +1.2%   +0.4%


PRICES — Predicted Changes Between End of 2003 and April 2004

Manufacturing

Forty-seven percent of purchasing and supply managers expect the prices they pay to increase in the first part of 2004 by an average of 4.3 percent. At the same time, 25 percent anticipate decreases averaging 4.1 percent. Including the 28 percent who expect no change in prices in the first four months of 2004, purchasers expect the net average overall price change to increase 1 percent for the period. Eight industries predict above average increases in prices paid for the first part of 2004: Textiles; Miscellaneous*; Glass, Stone, & Aggregate; Industrial & Commercial Equipment & Computers; Primary Metals; Instruments & Photographic Equipment; Wood & Wood Products; and Chemicals.

Non-Manufacturing

Forty-nine percent of non-manufacturing purchasers expect the prices they pay to increase 4.6 percent in the first part of 2004. Also, 16 percent anticipate price decreases averaging 5.4 percent. Including the 35 percent who expect no change in prices in the first four months of 2004, the net average overall price change is anticipated to be an increase of 1.5 percent for the period. Industries predicting the largest increase in prices they pay in the first part of 2004 are: Business Services; Public Administration; Agriculture; Health Services; and Retail Trade.

Prices — Predicted Changes Between End of 2003 and April 2004
  Manufacturing Non-Manufacturing
  Predicted
Dec 2003
Magnitude
of Change
Predicted
Dec 2003
Magnitude
of Change
Higher 47% +4.3% 49% +4.6%
Same 28% NA 35% NA
Lower 25% -4.1% 16% -5.4%
Net Average   +1.0%   +1.5%


PRICES — Predicted Changes Between End of 2004 and End of 2003

Manufacturing

The forecast indicates respondents expect slightly higher prices in 2004 with 56 percent expecting an average price increase of 4.7 percent, while 26 percent expect an average decline of 5 percent. The remaining 18 percent expect no change in their average prices paid for the coming year. The net average of the responses indicates an increase of 1.3 percent overall by the end of 2004. Industries expecting to pay above average prices by the end of 2004 are: Textiles; Miscellaneous*; Primary Metals; Glass, Stone, & Aggregate; Apparel; Industrial & Commercial Equipment & Computers; Wood & Wood Products; and Fabricated Metals.

Non-Manufacturing

Looking out to the end of 2004, non-manufacturing purchasers expect prices they pay to increase a moderate amount in the last part of the year resulting in an overall increase for the entire year of 2.1 percent. Sixty percent of purchasers anticipate price increases with an average increase of 5.1 percent. Eighteen percent of purchasers expect decreased prices with an average reduction of 5.7 percent. Twenty-two percent of members do not expect prices to change, resulting in a 2.1 percent overall average price increase for the year. Industries expecting the highest rates of price increases by the end of 2004 are: Health Services; Public Administration; Real Estate; Agriculture; Retail Trade; and Entertainment.

Predicted Price Changes Between End of 2004 and End of 2003
  Manufacturing Non-Manufacturing
  Predicted
Dec 2003
Magnitude
of Change
Predicted
Dec 2003
Magnitude
of Change
Higher 56% +4.7% 60% +5.1%
Same 18% NA 22% NA
Lower 26% -5.0% 18% -5.7%
Net Average   +1.3%   +2.1%


LABOR AND BENEFIT COSTS — Predicted Rate Change End of 2004 vs. End of 2003

Manufacturing

Purchasing and supply executives' expectation for change in overall labor and benefit costs for 2004 (2.7 percent) are slightly higher than they were in December 2002 (2.6 percent) for 2003. Seventy-eight percent of members expect increased labor and benefit costs and expect them to grow by an average of 3.8 percent for all of 2004, while the 3 percent forecasting lower costs see them decreasing by an average of 5.4 percent. Considering the 19 percent that believe costs will remain stable, the expected overall net rate of increase is 2.7 percent between the end of 2003 and the end of 2004. Industries expecting to pay 2.7 percent or higher are: Wood & Wood Products; Textiles; Fabricated Metals; Miscellaneous*; Transportation & Equipment; Rubber & Plastic Products; Printing & Publishing; Electronic Components & Equipment; and Chemicals.

Non-Manufacturing

Purchasing and supply executives' expectations for change in labor and benefit costs for non-manufacturing industries in 2004 are higher than they were a year ago for 2003. Sixty-eight percent of respondents expect such costs to increase by an average 4.6 percent. Another 5 percent of purchasers expect labor and benefit costs to shrink by an average 12.3 percent. Including the 27 percent who believe costs will remain stable during 2004, the expected overall net average rate of increase is 2.5 percent. The forecast in December 2002 for 2003 was an increase of 1.1 percent. Industries expecting the largest increases in labor and benefit costs in 2004 over 2003 are: Mining; Health Services; Insurance; Public Administration; Retail Trade; Utilities; and Construction.

Labor and Benefit Costs — Predicted Rate Change End of 2004 vs. End of 2003
  Manufacturing Non-Manufacturing
  Predicted
for 2003
Dec 2002
Predicted
for 2004
Dec 2003
Magnitude
of Change
Predicted
for 2003
Dec 2002
Predicted
for 2004
Dec 2003
Magnitude
of Change
Higher 78% 78% +3.8% 63% 68% +4.6%
Same 16% 19% NA 28% 27% NA
Lower 6% 3% -5.4% 9% 5% -12.3%
Net Average +2.6%   +2.7% +1.1%   +2.5%


EMPLOYMENT

Manufacturing

ISM's Manufacturing Business Survey Committee members forecast that manufacturing employment will increase slightly by 0.3 percent in 2004, with 36 percent expecting employment to be 6.2 percent higher. This is compared to the 17 percent who predict employment to be lower by 10.8 percent. The remaining 47 percent of members expect their employment levels to be unchanged in 2004. The five industries predicting 1 percent growth or greater in employment are: Transportation & Equipment; Wood & Wood Products; Electronic Components & Equipment; Fabricated Metals; and Printing & Publishing.

Non-Manufacturing

ISM's Non-Manufacturing Business Survey Committee members report that non-manufacturing employment has decreased 0.5 percent since April 2003 and forecast that employment will increase 1.4 percent in 2004. For 2004, 35 percent expect greater numbers of workers, 15 percent of members anticipate fewer workers, and 50 percent expect their employment levels to be unchanged from 2003 levels. Industries anticipating the greatest increase in their employment in 2004 are: Other Services**; Retail Trade; Communication; Entertainment; and Business Services.

Predicted Change in Overall Employment
  Manufacturing Non-Manufacturing
  Predicted
For 2004
Dec 2003
Nominal
% Change
Predicted
For 2004
Dec 2003
Nominal
% Change
Higher 36% +6.2% 35% +7.7%
Same 47% NA 50% NA
Lower 17% -10.8% 15% -8.2%
Net Average   --   +0.3%   --   +1.4%
Diffusion Index 59.5%   --   60%   --  

Note: A diffusion index above 50 percent would generally indicate an expectation of higher employment; below 50 percent, an expectation of lower employment.


EXPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2004)

Manufacturing

The responses for this semiannual report indicate purchasers are feeling optimistic about new export orders for the first half of 2004. This is consistent with recent ISM New Export Orders Index data in the monthly Manufacturing ISM Report On Business®, which has shown a faster rate of growth in new export orders. Of the 80 percent of members who export, 51 percent predict an increase (47 percent moderate and 4 percent substantial) over the next half-year. Additionally, 8 percent (7 percent moderate, 1 percent substantial) see a decrease in their exports and 41 percent anticipate no change in exports over the next half-year. Thirteen industries expect above average growth in exports: Food; Instruments & Photographic Equipment; Furniture; Fabricated Metals; Electronic Components & Equipment; Chemicals; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Paper; Transportation & Equipment; Primary Metals; Wood & Wood Products; and Miscellaneous*.

Non-Manufacturing

For the next half-year, non-manufacturing purchasing and supply executives who report that their organizations engage in exporting feel relatively optimistic concerning their export business. Of the 21 percent of non-manufacturing business survey respondents who export, 42 percent predict an increase (42 percent moderate and 0 percent substantial) over the next half-year. Three percent of members see a decrease in their exports (0 percent moderate and 3 percent substantial), and 55 percent anticipate no change in exports over the next half-year. Industries expecting growth in export business are: Construction; Wholesale Trade; Communication; Public Administration; Retail Trade; Other Services**; and Mining.

Predicted Change in Export Business — Next Half Year
  Manufacturing Non-Manufacturing
  For 2003 For 2004 For 2003 For 2004
  First Half
of 2003
Predicted
Dec 2002
Second Half
of 2003
Predicted
May 2003
First Half
of 2004
Predicted
Dec 2003
First Half
of 2003
Predicted
Dec 2002
Second Half
of 2003
Predicted
May 2003
First Half
of 2004
Predicted
Dec 2003
Substantial Increase 1% 4% 4% 0% 0% 0%
Moderate Increase 48% 41% 47% 38% 9% 42%
No Change 39% 46% 41% 59% 79% 55%
Moderate Decrease 10% 9% 7% 3% 6% 0%
Substantial Decrease 2% 0% 1% 0% 6% 3%
Diffusion Index 68.5% 68% 71.5% 67.5% 48.5% 69.5%


IMPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2004)

Manufacturing

Purchasers expect continued growth in imports in the first half of 2004. Of the 83 percent of purchasers who import, 65 percent predict an increase in their imports over the next half-year (49 percent moderate and 16 percent substantial), while 5 percent predict a decrease in imports of materials (3 percent moderate and 2 percent substantial). Less than one-third of survey members (30 percent) expect no change in imports. Industries expecting above average growth in imports are: Textiles; Fabricated Metals; Instruments & Photographic Equipment; Furniture; Transportation & Equipment; Miscellaneous*, Printing & Publishing; Electronic Components & Equipment; Food; Industrial & Commercial Equipment & Computers; Wood & Wood Products; Apparel; Rubber & Plastic Products; Paper; Glass, Stone, & Aggregate; and Chemicals.

Non-Manufacturing

Of the 39 percent of non-manufacturing purchasers who import, 52 percent predict an increase in their imports over the next half-year (39 percent moderate and 13 percent substantial). Five percent predict a decrease in imports of materials and services (5 percent moderate and 0 percent substantial). The remaining 43 percent of purchasers expect no change in imports over the next half year. Industries expecting growth in imports are: Retail Trade; Health Services; Other Services**; Wholesale Trade; Business Services; Communication; Construction; Entertainment; and Mining.

Predicted Change in Import Business — Next Half Year
  Manufacturing Non-Manufacturing
  For 2003 For 2004 For 2003 For 2004
  First Half
of 2003
Predicted
Dec 2002
Second Half
of 2003
Predicted
May 2003
First Half
of 2004
Predicted
Dec 2003
First Half
of 2003
Predicted
Dec 2002
Second Half
of 2003
Predicted
May 2003
First Half
of 2004
Predicted
Dec 2003
Substantial Increase 12% 7% 16% 4% 9% 13%
Moderate Increase 40% 46% 49% 36% 30% 39%
No Change 42% 38% 30% 56% 54% 43%
Moderate Decrease 5% 8% 3% 2% 7% 5%
Substantial Decrease 1% 1% 2% 2% 0% 0%
Diffusion Index 73% 72% 80% 68% 66% 73.5%


BUSINESS REVENUES

Business Revenues Comparison — 2003 vs. 2002

Manufacturing

Summarizing revenues for 2003, 54 percent say revenue was better than 2002, and that their nominal (before adjusting for inflation) revenues increased an average of 9.8 percent over 2002. Conversely, 24 percent say their nominal revenues decreased in 2003 by an average of 10 percent, and the remaining 22 percent indicate no change. Purchasing and supply executives indicate an overall net nominal increase of 2.8 percent in business revenues for 2003 over 2002. This is higher than the 1.9 percent increase, which was forecast in May 2003 for all of 2003, and significantly lower than the 5.4 percent increase predicted in December 2002 for all of 2003.

Manufacturing Business Revenues — 2003 vs. 2002
  Predicted
Dec 2002
Nominal
% Change
Predicted
May 2003
Nominal
% Change
Reported
Dec 2003
Nominal
% Change
Higher 70% +9.2% 55% +8.5% 54% +9.8%
Same 19% NA 20% NA 22% NA
Lower 11% -9.1% 25% -11.6% 24% -10.0%
Net Average   +5.4%   +1.9%   +2.8%

Non-Manufacturing

Looking back on 2003, non-manufacturing purchasing and supply executives say it was substantially better than 2002. They report an overall average revenue increase of 4.6 percent for 2003 compared to a 1.1 percent increase reported one year ago for 2002. Fifty-six percent of respondents said that their nominal (without adjusting for inflation) revenues increased by an average 11.7 percent over 2002. Conversely, 19 percent say their nominal revenues decreased in 2003 by an average 10.3 percent. Including the 25 percent who say revenues were about the same in both years, the result is an overall net nominal increase of 4.6 percent for 2003 over 2002. This result is somewhat below the 5.4 percent forecast in May 2003 and the 5.7 percent predicted in December 2002.

Non-Manufacturing Business Revenues — 2003 vs. 2002
  Predicted
Dec 2002
Nominal
% Change
Predicted
May 2003
Nominal
% Change
Reported
Dec 2003
Nominal
% Change
Higher 70% +11.4% 58% +13.3% 56% +11.7%
Same 17% NA 19% NA 25% NA
Lower 13% -16.1% 23% -9.7% 19% -10.3%
Net Average   +5.7%   +5.4%   +4.6%


Business Revenues Prediction for 2004

Manufacturing

Purchasers forecast that 2004 will be better than 2003. Their expectations are more optimistic than they have been since May of 2000. The 76 percent of members forecasting better business in 2004 than in 2003 estimate an average nominal (before adjusting for inflation) increase of 10 percent in their companies' revenues. This compares to an average nominal decrease of 20.1 percent forecast by the 8 percent who predict worse business in 2004. Including the 16 percent who see no change in 2004, the forecast for overall net nominal growth in business revenues for 2004 over 2003 is 5.8 percent. The industries predicting a greater than 3 percent increase in nominal revenues in 2004 are: Electronic Components & Equipment; Transportation & Equipment; Fabricated Metals; Primary Metals; Textiles; Instruments & Photographic Equipment; Furniture; Rubber & Plastic Products; Food; Wood & Wood Products; Glass, Stone, & Aggregate; Printing & Publishing; and Miscellaneous*.

Non-Manufacturing

Non-manufacturing purchasers forecast that business for 2004 will be improved over 2003 and by a larger margin than the reported 2003 increase over 2002. The 67 percent of members forecasting better business in 2004 than in 2003 estimate an average nominal (before adjusting for inflation) increase of 10.5 percent in their organizations' revenues. This compares to an average nominal decrease of 17.3 percent forecast by the 8 percent who predict worse business in 2004. Including the 25 percent who see no change in 2004, the forecasted overall net nominal growth in non-manufacturing business revenue in 2004 over 2003 is 5.7 percent (reported 2003 increase over 2002 is 4.6 percent). Industries expecting the largest percent increase in revenues in 2004 are: Business Services; Real Estate; Mining; Entertainment; Retail Trade; and Wholesale Trade.

Business: 2004 vs. 2003 Revenues
  Manufacturing Non-Manufacturing
  Predicted
Dec 2003
Nominal
% Change
Predicted
Dec 2003
Nominal
% Change
Higher 76% +10.0% 67% +10.5%
Same 16% NA 25% NA
Lower 8% -20.1% 8% -17.3%
Net Average   +5.8%   +5.7%


PROFIT MARGINS

Manufacturing

Survey respondents report that profit margins have stayed the same on average during the second and third quarters of 2003 as 36 percent experienced an increase in profit margins, an equal number (36 percent) had lower margins, and 28 percent reported no change. However, their expectations are for significant increases between now and April of 2004 as 47 percent predict better profits margins (an increase of 11 percentage points), 14 percent predict lower margins (a decrease of 22 percentage points), and 39 percent predict no change (an increase of 11 percentage points).

Non-Manufacturing

Non-manufacturing purchasing and supply 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 35 percent experienced an increase in profit margins during the second and third quarters of 2003, while 29 percent found smaller profit margins and 36 percent had no change in margins during the same period. Looking ahead over the period November 2003 to April 2004, 39 percent expect improved profit margins, 13 percent expect lower profit margins, and the remaining 48 percent of members anticipate no change in their profit margins over that period of time.

Profit Margins
  Manufacturing Non-Manufacturing
  Apr 2003 through
Sep 2003
Reported Dec 2003
Nov 2003 through
Apr 2004
Predicted Dec 2003
Apr 2003 through
Sep 2003
Reported Dec 2003
Nov 2003 through
Apr 2004
Predicted Dec 2003
Better 36% 47% 35% 39%
Same 28% 39% 36% 48%
Worse 36% 14% 29% 13%
Diffusion Index 50% 66.5% 53% 63%

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


66th Semiannual Economic Forecast -- Continued...