FOR RELEASE: December 9, 2003

BUSINESS COMPARISON

The First Half of 2004 with Last Half of 2003

Manufacturing

Looking ahead to the next half year, members are more optimistic about the next half year than they have been at any other time in the history of this forecast. Comparing their outlook for the first half of 2004 to the last half of 2003, 61 percent predict it will be better, 10 percent predict it will be worse, and 29 percent expect no change. Compared to the diffusion index of one year ago (61.5 percent), members are more optimistic about prospects in the manufacturing sector for the first half-year (75.5 percent).

Non-Manufacturing

Looking ahead to the next half year, members are somewhat more optimistic than they were one year ago looking ahead to the first half of 2003. The current diffusion index is 73 percent compared to last year's 65.5 percent in December 2002. Comparing their expectations for the first half of 2004 to the last half of 2003, 54 percent of non-manufacturing purchasers expect it will be better, 8 percent anticipate it will be worse, and 38 percent predict no change.

Business — First Half 2004 vs. Last Half 2003
	Manufacturing	Non-Manufacturing
	Predicted Dec 2003	Predicted Dec 2003
Better	61%	54%
Same	29%	38%
Worse	10%	8%
Diffusion Index	75.5%	73%

Note: A diffusion index above 50 percent would generally indicate an expectation of the first half of the coming year being better than the second half of the current year.

The Second Half of 2004 with the First Half of 2004

Manufacturing

Purchasing and supply executives are slightly less optimistic about the second half of 2004 compared to the first half of the year. The proportion of members who forecast the second half of 2004 to be better than the first half is 54 percent, while 6 percent expect it to be worse and 40 percent expect no change.

Non-Manufacturing

Non-manufacturing purchasing and supply executives are slightly more optimistic concerning the second half of 2004 compared to the first half of the year. The proportion of members who forecast the second half of 2004 to be better than the first half is 53 percent, while 3 percent expect it to be worse. An additional 44 percent of purchasers expect no change.

Business — Second Half 2004 vs. First Half 2004
	Manufacturing	Non-Manufacturing
	Predicted Dec 2003	Predicted Dec 2003
Better	54%	53%
Same	40%	44%
Worse	6%	3%
Diffusion Index	74%	75%

Note: A diffusion index above 50 percent would generally indicate an expectation of the second half of the coming year being better than the first half.

SUPPLY CHAIN PRACTICES IN 2004

Manufacturing

In response to a special question regarding supply chain optimization, 80 percent of purchasing and supply executives plan to take new steps in 2004 to improve their supply chain management practices. Improved supplier relationships are at the top of the list for 2004. Supplier relationship management includes increasing or decreasing the supply base, more onsite visits, spend analysis, continuous improvement, supplier auditing / qualification, and tightening performance metrics. Better inventory management is second on the list. Organizational changes are next, followed by technology improvements (particularly new ERP systems), and increased focus on global sourcing are the other major issues of concern to supply managers.

1. Supplier relationships / consolidation
2. Better inventory management
3. Organizational issues
4. Technology improvements
5. Global sourcing / offshore supply

Non-Manufacturing

Responding to a special question regarding supply chain improvements planned for 2004, 76 percent of members stated that they plan to take steps in the new year to improve their supply chain management practices. Members indicate a strong preference for electronic commerce and e-procurement as the number one means of improvement. Following that preference, members indicated other initiatives as listed below:

1. Electronic commerce and e-procurement
2. Technology improvements
3. Procurement centralization and strategic sourcing
4. Supplier relationship management
5. Better inventory management

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers continue to reduce their purchased inventories as has been the trend consistently reported for the last 14 years in the monthly Manufacturing ISM Report On Business®. In this forecast, 30 percent expect to reduce their purchased inventory-to-sales ratio during 2004. This compares to 14 percent who expect the ratio to grow and 56 percent who predict no change.

Non-Manufacturing

Of the 54 percent of non-manufacturing purchasers who answered this question, 17 percent anticipate reducing their purchased inventory-to-sales ratio during 2004. An additional 20 percent expect their ratio to rise and 63 percent see no change.

Predicted Change in Purchased Inventory-to-Sales Ratio
	Manufacturing			Non-Manufacturing
	For 2003 Predicted Dec 2002	Balance of 2003 Predicted May 2003	For 2004 Predicted Dec 2003	For 2003 Predicted Dec 2002	Balance of 2003 Predicted May 2003	For 2004 Predicted Dec 2003
Greater	8%	11%	14%	11%	13%	20%
Same	55%	53%	56%	66%	69%	63%
Smaller	37%	36%	30%	23%	18%	17%
Diffusion Index	35.5%	37.5%	42%	44.0%	47.5%	51.5%

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 2002, respondents expect significant improvement as 36 percent expect "good" holiday sales. Over half (58 percent) expect them to be "average," while 6 percent expect them to be "poor."

Non-Manufacturing

The outlook for holiday retail sales for 2003 is brighter than was expected in the past several years. In assessing prospects for sales in their geographic areas, 41 percent of non-manufacturing members predict sales will be "good," while only 5 percent expect them to be "poor," and 54 percent expect them to be "average."

Expectations for Holiday Sales
	Manufacturing			Non-Manufacturing
	Dec 2001	Dec 2002	Dec 2003	Dec 2001	Dec 2002	Dec 2003
Good	10%	13%	36%	15%	17%	41%
Average	61%	72%	58%	58%	61%	54%
Poor	29%	15%	6%	27%	22%	5%

ECONOMIC CONCERNS

Manufacturing

Even though price increases are predicted to be modest in 2004, inflation as it relates to currencies, commodities, and interest rates is the number one concern in the year ahead. Members are also concerned about energy costs (particularly natural gas), health care costs, swings in the U.S. Dollar, and the potential for continued terrorism / war.

Economic Concerns

1. Inflation
2. Energy Costs
3. Health care costs
4. U.S. Dollar — Strength/Weakness
5. Terrorism / War

Non-Manufacturing

The number one economic concern of non-manufacturing purchasing executives in late 2003 is health care costs. That is closely followed by concern for inflation and accompanying higher costs of materials and services. Other concerns include: energy costs, terrorism and the threat of war, and employment growth and sustainability.

Economic Concerns

1. Health care costs
2. Inflation
3. Energy costs
4. Terrorism / War
5. Employment

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Members' companies are very bullish about the next 12 months when compared to their responses in May 2003 and December 2002. The 70 percent who report a better outlook is significantly greater than the 54 percent response received in May 2003. The 23 percent who report that the outlook is the same is down from the 35 percent reported in May 2003, and the 7 percent who indicated the outlook to be worse is lower than the 11 percent reported in May 2003.

Non-Manufacturing

The outlook for the next 12 months for non-manufacturing survey members remains positive, and to a substantially greater degree than in May 2003. The proportion who project the next 12 months to be better is 64 percent (50 percent in May), the proportion who report that the outlook is the same is 26 percent (27 percent in May), and the proportion who indicated a worse outlook is 10 percent (23 percent in May).

Outlook — Next 12 Months
	Manufacturing			Non-Manufacturing
	Dec 2002	May 2003	Dec 2003	Dec 2002	May 2003	Dec 2003
Better	46%	54%	70%	51%	50%	64%
Same	38%	35%	23%	35%	27%	26%
Worse	16%	11%	7%	14%	23%	10%
Diffusion Index	65%	71.5%	81.5%	68.5%	63.5%	77%

U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2004 — Manufacturing Only

Manufacturing

Purchasing and supply executives remain optimistic concerning the prospective strength of the U.S. dollar for 2003. The average diffusion index for this forecast is 53 percent, compared to 61.9 percent for the December 2002 forecast. Of the seven currencies, the U.S. dollar is expected to be weaker than the Taiwan $, Japanese Yen, and Korean Won.

U.S. Dollar Will Be:	Euro	Can. $	British Pound	Japanese Yen	Mexican Peso	Korean Won	Taiwan $
Stronger than	42%	39%	36%	35%	48%	29%	29%
Same as	17%	37%	40%	28%	29%	37%	41%
Weaker than	41%	24%	24%	37%	23%	34%	30%
Diffusion Index	50.5%	57.5%	56%	49%	62.5%	47.5%	49.5%

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.

Benefits of Applying Technology

Manufacturing

A special question was asked of purchasing and supply executives to determine their company's progress in achieving efficiencies from the application of technology to supply management. Approximately 84 percent of respondents indicate they are less than three-fourths complete in achieving benefits from applying technology. It is obvious from this data that there is still significant improvement to be gained from the application of technology.

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. Just over 73 percent of non-manufacturing members recognize less than three-fourths of the potential benefits of applying technology.

Benefits of Applying Technology
% Benefits Realized to Date	Manufacturing % of Responses	Non-Manufacturing % of Responses
90-100	0.5%	4.3%
75-89	15.2%	22.4%
50-74	35.0%	32.3%
Less than 50	49.3%	41%

SUMMARY

Manufacturing

• Operating rate is currently 80.1 percent of normal capacity.
• Capital expenditures increased 2.7 percent in 2003.
• Capital expenditures will increase 3.2 percent in 2004.
• Production capacity will increase 3.8% percent during 2004.
• Prices paid increased 0.7 percent during 2003.
• Overall 2004 prices will increase 1.3 percent from 2003.
• Labor and benefits costs will increase at a 2.7 percentage rate in 2004.
• Manufacturing employment will increase 0.3 percent in 2004.
• The U.S. dollar is expected to maintain its position versus major currencies.
• Exports will continue to grow in 2004.
• Imports will continue to grow in 2004.
• Holiday retail sales as viewed by purchasers will be significantly improved over 2002.
• Manufacturing revenues (nominal) are up by 2.8 percent in 2003.
• Manufacturing revenues (nominal) will be up by 5.8 percent in 2004.
• Major concerns to manufacturers: inflation, energy costs, health care costs, currency changes, and terrorism / war.
• Overall attitude of manufacturing management — greater optimism, significantly better than December 2002.

Non-Manufacturing

• Operating rate is currently 85.6 percent of normal capacity.
• Capital spending increased 2.2 percent in 2003.
• Capital spending will increase 7.1 percent in 2004 compared to 2003.
• Production and provision capacity will increase 4.4 percent in 2004.
• Prices paid increased 0.4 percent during 2003.
• Prices paid will increase 2.1 percent in 2004.
• Labor and benefit costs will increase 2.5 percent during 2004.
• Non-manufacturing employment will increase 1.4 percent in 2004.
• Exports by non-manufacturing industries will increase during 2004.
• Imports by non-manufacturing industries will increase during 2004.
• Holiday retail sales expected to be improved over 2002.
• Non-manufacturing revenues (nominal) are up by 4.6 percent in 2003.
• Non-manufacturing revenues (nominal) will be up by 5.7 percent in 2004.
• Major concerns to non-manufacturers: health care costs, inflation, energy costs, terrorism / war, and employment.
• Non-manufacturing purchasers are more optimistic about the next 12 months than they were one year ago.

*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 and Non-Manufacturing ISM Report On Business® are issued monthly and are considered by many economists to be the most reliable near-term economic barometers available. They are reviewed regularly by top government agencies and economic business leaders. The Manufacturing ISM Report On Business®, compiled from responses to questions asked of more than 350 purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies, and prices. It has been issued by the association since 1931, except during World War II.

The Manufacturing and Non-Manufacturing ISM Report On Business® are published monthly by the Institute for Supply Management™. The Institute for Supply Management™, established in 1915, is the largest supply management organization in the world as well as one of the most respected. ISM's mission is to lead the supply management profession through its standards of excellence, research, promotional activities, and education. For further information, see the ISM Web site at www.ism.ws.

The full text version of the monthly reports is posted on ISM'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 ISM Report On Business® featuring the December 2003 data will be released at 10:00 a.m. (ET) on Friday, January 2, 2004.

The next Non-Manufacturing ISM Report On Business® featuring the December 2003 data will be released at 10:00 a.m. (ET) on Tuesday, January 6, 2004.

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