--- To enhance the value and performance of procurement and SCM practitioners and their organizations worldwide ---



68th Semiannual Economic Forecast (continued)

FOR RELEASE: December 8, 2004

BUSINESS REVENUES

Business Revenues Comparison — 2004 vs. 2003

Manufacturing

Summarizing revenues for 2004, 70 percent say revenue was better than 2003, and their nominal (before adjusting for inflation) revenues increased an average of 14.3 percent. Conversely, 14 percent say their nominal revenues decreased in 2004 by an average of 13 percent, and the remaining 16 percent indicate no change. Purchasing and supply executives indicate an overall net nominal increase of 8.3 percent in business revenues for 2004 over 2003. This is lower than the 9.7 percent increase which was forecast in April 2004 for all of 2004, and significantly higher than the 5.8 percent increase predicted in December 2003 for all of 2004. The industries reporting the largest percentage increase in revenues in 2004 are: Glass, Stone & Aggregate; Apparel; Primary Metals; Furniture; and Miscellaneous*.

Manufacturing Business Revenues — 2004 vs. 2003
  Predicted
Dec 2003
Nominal
% Change
Predicted
April 2004
Nominal
% Change
Reported
Dec 2004
Nominal
% Change
Higher 76% +10% 81% +13% 70% +14.3%
Same 16% NA 11% NA 16% NA
Lower 8% -20.1% 8% -11.2% 14% -13.0%
Net Average   +5.8%   +9.7%   +8.3%


Non-Manufacturing

Non-manufacturing purchasers report that business revenues for 2004 are improved over 2003 by an average of 6.4 percent. This is slightly higher than the 6.3 percent increase predicted in April 2004 for 2004 and somewhat higher than the 4.6 percent increase reported one year ago for 2003 revenues over 2002 revenues. The 68 percent of members reporting better business in 2004 than in 2003 estimate an average nominal (before adjusting for inflation) revenue increase of 11.5 percent. This compares to an average nominal decrease of 13.4 percent reported by the 9 percent who indicate lower revenues in 2004. The remaining 23 percent have experienced no change in revenue in 2004 over 2003. Industries reporting the largest percentage increase in revenues in 2004 are: Agriculture; Transportation; Mining; Business Services; Wholesale Trade; Finance & Banking; and Insurance.

Non-Manufacturing Business Revenues — 2004 vs. 2003
  Predicted
Dec 2003
Nominal
% Change
Predicted
April 2004
Nominal
% Change
Reported
Dec 2004
Nominal
% Change
Higher 67% +10.5% 66% +11.6% 68% +11.5%
Same 25% NA 18% NA 23% NA
Lower 8% -17.3% 16% -9.1% 9% -13.4%
Net Average   +5.7%   +6.3%   +6.4%


Business Revenues Prediction for 2005

Manufacturing

Purchasers forecast that revenues will be strong in 2005 compared to 2004, but down slightly when compared to 2004 revenue over 2003. The 75 percent of members forecasting better business in 2005 than in 2004 estimate an average nominal (before adjusting for inflation) increase of 12.2 percent in their companies' revenues. This compares to an average nominal decrease of 21.1 percent forecast by the 6 percent who predict lower revenues in 2005. Including the 19 percent who see no change in 2005, the forecast for overall net nominal growth in business revenues for 2005 over 2004 is 7.8 percent. The industries predicting growth greater than 7.8 percent in nominal revenues in 2005 are: Miscellaneous*; Glass, Stone & Aggregate; Fabricated Metals; Primary Metals; Instruments & Photographic Equipment; Transportation & Equipment; Apparel; and Electronic Components & Equipment.

Non-Manufacturing

Non-manufacturing purchasers forecast that business revenues for 2005 will be improved over 2004 by 5.9 percent. This is lower than the 6.4 percent increase reported for 2004 but higher than the 4.6 percent increase reported for 2003 revenues over 2002 revenues. The 66 percent of members forecasting better business in 2005 than in 2004 estimate an average nominal (before adjusting for inflation) revenue increase of 10.1 percent. This compares to an average nominal decrease of 12 percent forecast by the 7 percent who predict lower revenues in 2005. The remaining 27 percent see no change in 2005. Industries expecting above average increases in revenues in 2005 are: Transportation; Business Services; Entertainment; Mining; Other Services**; Communication; Insurance; Real Estate; Retail Trade; and Wholesale Trade.

Business: 2005 vs. 2004 Revenues
  Manufacturing Non-Manufacturing
  Predicted
Dec 2004
Nominal
% Change
Predicted
Dec 2004
Nominal
% Change
Higher 75% +12.2 66% +10.1%
Same 19% NA 27% NA
Lower 6% -21.1 7% -12.0%
Net Average   +7.8%   +5.9%


PROFIT MARGINS

Manufacturing

Survey respondents report that profit margins have declined on average during the second and third quarters of 2004 as 34 percent experienced an increase in profit margins, while a larger number (42 percent) had lower margins, and 24 percent reported no change. However, their expectations are for significant increases between now and April of 2005 as 39 percent predict better profit margins (an increase of 5 percentage points), 21 percent predict lower margins (a decrease of 21 percentage points), and 40 percent predict no change (an increase of 16 percentage points). Industries expecting to increase margins in 2005 are: Glass, Stone & Aggregate; Miscellaneous*; Food; Apparel; Chemicals; Fabricated Metals; Transportation & Equipment; Electronic Components & Equipment; and Industrial & Commercial Equipment & Computers.

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 30 percent experienced an increase in profit margins during the April 2004 to September 2004 period, while 24 percent found smaller profit margins and 46 percent had no change in margins during the same period. Looking ahead over the November 2004 to April 2005 period, 37 percent of supply managers expect improved margins, only 13 percent expect lower profit margins, and the remaining 50 percent of members anticipate no change in their profit margins.

Profit Margins
  Manufacturing Non-Manufacturing
  Apr 2004 through
Sep 2004
Reported Dec 2004
Nov 2004 through
Apr 2005
Predicted Dec 2004
Apr 2004 through
Sep 2004
Reported Dec 2004
Nov 2004 through
Apr 2005
Predicted Dec 2004
Better 34% 39% 30% 37%
Same 24% 40% 46% 50%
Worse 42% 21% 24% 13%
Diffusion Index 46% 59% 53% 62%


BUSINESS COMPARISON

The First Half of 2005 with Last Half of 2004

Manufacturing

Looking ahead to the next half year, members are optimistic about the next half year. When comparing their outlook for the first half of 2005 to the last half of 2004, 52 percent predict it will be better, 15 percent predict it will be worse, and 33 percent expect no change. Compared to the diffusion index of one year ago (75.5 percent) that reflected the same relative period, members are less optimistic about prospects in the manufacturing sector for the first half-year (68.5 percent). The industries expecting the highest rate of improvement in the first half of 2005 are: Leather; Electronic Components & Equipment; Rubber & Plastic Products; Furniture; and Industrial & Commercial Equipment & Computers.

Non-Manufacturing

The first half of 2005 is looking better than the last half of 2004, according to non-manufacturing purchasing and supply managers. The diffusion index indicating current expectations is 70.5 percent. Fifty percent of members expect the first half of next year to be better than the last half of this year, 9 percent anticipate it will be worse, and 41 percent predict no change. The industries expecting the most improvement in the first half of 2005 are: Entertainment; Mining; Communication; Other Services**; Business Services; Utilities; and Transportation.

Business — First Half 2005 vs. Last Half 2004
  Manufacturing Non-Manufacturing
  Predicted
Dec 2004
Predicted
Dec 2004
Better 52% 50%
Same 33% 41%
Worse 15% 9%
Diffusion Index 68.5% 70.5%

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 2005 with the First Half of 2005

Manufacturing

Purchasing and supply executives are slightly more optimistic about the second half of 2005 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 45 percent, while 7 percent expect it to be worse, and 48 percent expect no change. The industries predicting the largest rate of improvement in the second half of 2005 are: Miscellaneous*; Leather; Glass, Stone & Aggregate; Fabricated Metals; and Transportation & Equipment.

Non-Manufacturing

Comparing the second half of 2005 to the first half, non-manufacturing purchasing and supply executives feel slightly more optimistic than they do for the first half of the year compared to the last half of 2004 (diffusion index of 73 percent compared to 70.5 percent). The proportion of members who currently forecast the second half of 2005 to be better than the first half is 50 percent, while 4 percent expect it to be worse. An additional 46 percent of purchasers expect no change. The industries expecting the greatest improvement in the second half of the year are: Transportation; Legal Services; Business Services; Other Services**; and Health Services.

Business — Second Half 2005 vs. First Half 2005
  Manufacturing Non-Manufacturing
  Predicted
Dec 2004
Predicted
Dec 2004
Better 45% 50%
Same 48% 46%
Worse 7% 4%
Diffusion Index 69% 73%

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 2005

Manufacturing

In response to a special question regarding supply chain optimization, 74 percent of purchasing and supply executives plan to take new steps in 2005 to improve their supply chain management practices. Enhancing supplier relationships is at the top of the list for 2005. Systems improvements such as new systems and implementing new tools (including forecasting and planning), processes and software is second on the list. Application of electronic commerce solutions; rationalizing the supplier base; and reducing costs are the other major issues of concern to supply managers.

  1. Supplier Relationship Enhancements
  2. Process, Tools, Systems and Software Improvements
  3. Application of Electronic Commerce
  4. Supply Base Rationalization
  5. Cost Reduction
Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2005, 67 percent of members stated that they plan to take steps during the current year to improve their supply chain management practices. Members' first choice is new or increased application of various aspects of e-commerce. Following that preference, members indicated other initiatives as listed below:

  1. Application of Electronic Commerce
  2. Process, Tools, Systems and Software Improvements
  3. Increased Consolidation, Centralization and Control of Supply Management Activities
  4. Supplier Relationship Enhancements
  5. Supply Base Rationalization

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers will be increasing inventory on hand to support their planned level of sales during 2005. In this forecast, 15 percent expect to reduce their purchased inventory-to-sales ratio during 2005. This compares to 20 percent who expect the ratio to grow and 65 percent who predict no change.

Non-Manufacturing

Of the 55 percent of non-manufacturing purchasers who answered this question, 14 percent anticipate increasing their purchased inventory-to-sales ratio during 2005. An additional 10 percent expect their ratio to drop and 76 percent see no change. The diffusion index of 52 percent suggests continued building of inventories in 2005 but at a relatively slow rate of increase.

Predicted Change in Purchased Inventory-to-Sales Ratio
  Manufacturing Non-Manufacturing
  For 2004
Predicted
Dec 2003
Balance of 2004
Predicted
April 2004
For 2005
Predicted
Dec 2004
For 2004
Predicted
Dec 2003
Balance of 2004
Predicted
April 2004
For 2005
Predicted
Dec 2004
Greater 14% 16% 20% 20% 12% 14%
Same 56% 61% 65% 63% 85% 76%
Smaller 30% 23% 15% 17% 3% 10%
Diffusion Index 42% 46.5% 52.5% 51.5% 54.5% 52%

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 2003, respondents expect significant improvement as 41 percent expect "good" holiday sales. Over half (55 percent) expect them to be "average," while 4 percent expect them to be "poor."

Non-Manufacturing

Non-manufacturing purchasing and supply executives expect a less robust holiday sales season for 2004 than they did for 2003 as 31 percent expect "good" sales for 2004 while 41 percent anticipated "good" sales in 2003. Almost two-thirds of members (65 percent) forecast an "average" sales season this year and 4 percent expect a "poor" year.

Expectations for Holiday Sales
  Manufacturing Non-Manufacturing
  Dec 2002 Dec 2003 Dec 2004 Dec 2002 Dec 2003 Dec 2004
Good 13% 36% 41% 17% 41% 31%
Average 72% 58% 55% 61% 54% 65%
Poor 15% 6% 4% 22% 5% 4%


ECONOMIC CONCERNS

Manufacturing

It has been quite some time since Inflation has led the list of concerns, but it is definitely back and a concern to survey members. Energy, one of the major drivers of inflation, is the second concern, so it is obvious that cost issues are of great concern at this time. A weak economy is the next concern followed by effects of war and geopolitical concerns; and labor, benefits and healthcare costs, including labor shortages complete the list. While the list is quite broad, the responses are dominated by concerns focusing on cost pressures and supply chain constraints.

Economic Concerns

  1. Prices and Inflation
  2. Energy Price Increases
  3. Weak Economy
  4. Effects of War and Geopolitical Concerns
  5. Labor, Benefits and Healthcare Costs, including Labor Shortages
Non-Manufacturing

The number one economic concern of non-manufacturing purchasing and supply executives at the present time is energy costs. Other concerns include: price increases other than energy; employment labor and benefit costs, particularly healthcare costs; weak economy; and effects of war and geopolitical concerns. The top five responses in order of importance are:

Economic Concerns

  1. Energy Price Increases
  2. Prices and Inflation
  3. Labor, Benefits and Healthcare Costs, including Labor Shortages
  4. Weak Economy
  5. Effects of War and Geopolitical Concerns

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Members' companies are optimistic about the next 12 months, but not as bullish when compared to their responses in April 2004 and December 2003. The 63 percent who report a better outlook is less than the 70 percent response received in April 2004. The 28 percent who report that the outlook is the same is up from the 20 percent reported in April 2004, and the 9 percent who indicated the outlook to be worse is lower than the 10 percent reported in April 2004.

Non-Manufacturing

Non-manufacturing survey members' organizations have a higher degree of optimism now than they had in either April 2004 or December of 2003. The 63 percent who currently report a better outlook is about the same as the 64 percent who had that outlook in April 2004 as well as one year ago. Thirty-three percent expect no change in the outlook and 4 percent feel the outlook will be worse over the next 12 months.

Outlook — Next 12 Months
  Manufacturing Non-Manufacturing
  Dec 2003 April 2004 Dec 2004 Dec 2003 April 2004 Dec 2004
Better 70% 70% 63% 64% 64% 63%
Same 23% 20% 28% 26% 26% 33%
Worse 7% 10% 9% 10% 10% 4%
Diffusion Index 81.5% 80% 77% 77% 77% 79.5%


U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2005 — Manufacturing Only

Manufacturing

Purchasing and supply executives remain moderately optimistic concerning the prospective strength of the U.S. dollar for 2005. The average diffusion index for this forecast is 53 percent, the same as the December 2003 forecast. Of the seven currencies, the U.S. dollar is expected to be weaker than British Pound.

U.S. $ Will Be: Euro Can.
$
British
Pound
Japanese
Yen
Mexican
Peso
Korean
Won
Taiwan
$
Stronger than 42% 36% 25% 43% 41% 39% 36%
Same as 17% 39% 40% 20% 42% 32% 32%
Weaker than 41% 25% 35% 37% 17% 29% 32%
Diffusion Index 50.5% 55.5% 45% 53% 62% 55% 52%

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 to determine the progress of organizations in achieving efficiencies from the application of technology to supply management. Approximately 82 percent of respondents indicate they are less than three-fourths complete in achieving benefits from applying technology, and 47 percent indicate they are less than 50 percent complete. 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. The average response from non-manufacturing members was 50 percent, indicating that, on average, 50 percent of potential improvement is yet to be gained. While 28 percent of respondents have achieved at least 75 percent of their expected potential benefit, the remaining 72 percent still have significant benefits to gain.

Benefits of Applying Technology
% Benefits
Realized to Date
Manufacturing
% of Responses
Non-Manufacturing
% of Responses
90-100 3% 3%
75-89 15% 25%
50-74 35% 33%
Less than 50 47% 39%


SUMMARY

Manufacturing
  • Operating rate is currently 83 percent of normal capacity.
  • Capital expenditures increased 15.1 percent in 2004.
  • Capital expenditures will increase 1.6 percent in 2005.
  • Production capacity will increase 5.6 percent during 2005.
  • Prices paid increased 11.2 percent during 2004.
  • Overall 2005 prices will increase 4.4 percent from 2004.
  • Labor and benefits costs will increase at a 3.4 percentage rate in 2005.
  • Manufacturing employment will increase 1.6 percent in 2005.
  • The U.S. dollar is expected to strengthen somewhat against currencies of major trading partners.
  • Expect strong Export growth in 2005.
  • Expect strong Import growth in 2005.
  • Holiday retail sales as viewed by purchasers will be significantly improved over 2003.
  • Manufacturing revenues (nominal) are up by 8.3 percent in 2004.
  • Manufacturing revenues (nominal) will be up by 7.8 percent in 2005.
  • Major concerns to manufacturers: prices and inflation; energy price increases; weak economy; effects of war and geopolitical concerns; and labor, benefits and healthcare costs, including labor shortages
  • Overall attitude of manufacturing management — optimistic, not as strong as December 2003, but still very upbeat.
Non-Manufacturing
  • Operating rate is currently 88.2 percent of normal capacity.
  • Capital expenditures increased 4.5 percent in 2004.
  • Capital expenditures will increase 1.8 percent in 2005.
  • Production and provision capacity will increase 4.4 percent in 2005.
  • Prices paid increased 4.8 percent during 2004.
  • Prices paid will increase 3.6 percent during 2005.
  • Labor and benefit costs will increase at a 3.7 percentage rate during 2005.
  • Non-manufacturing employment will rise by 3.1 percent during 2005.
  • Expect strong export growth by non-manufacturing exporters in 2005.
  • Expect strong import growth by non-manufacturing importers in 2005.
  • Non-manufacturing revenues (nominal) rose 6.4 percent in 2004.
  • Non-manufacturing revenues (nominal) will rise 5.9 percent in 2005.
  • Major concerns: energy price increases; prices and inflation; labor, benefits and healthcare costs, including labor shortages; weak economy; and effects of war and geopolitical concerns.
  • Non-manufacturing purchasers are strongly optimistic, slightly more so than they were in April 2004 and significantly more so than in December 2003.

*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 ISM 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 350 purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies, customers' inventories and prices. The report has been issued by the association since 1931, except during World War II.

Covering the non-manufacturing sector, ISM debuted the Non-Manufacturing ISM Report On Business® in June 1998. The Non-Manufacturing ISM Report On Business® is released on the third business day of each month, and is based on data received from purchasing and supply executives from 17 different non-manufacturing industries across the country. The report covers business activity, new orders, backlog of orders, new export orders, inventory change, inventory sentiment, imports, prices, employment, and supplier deliveries. A weighted composite index similar to the PMI is not available at this time for this report.

The Manufacturing and Non-Manufacturing ISM Reports On Business® are published monthly by the Institute for Supply Management™. As the oldest and largest supply management institute in the world, the mission of the Institute for Supply Management™ (ISM) is to lead supply management. By executing and extending its mission through education, research, standards of excellence, influence building and information dissemination — including the renowned monthly ISM Report On Business® report — ISM continues to extend the global impact of supply management. ISM's membership base includes more than 43,000 supply management professionals in 75 countries. Supply management professionals are responsible for trillions of dollars in the purchases of products and services annually. ISM is a member of the International Federation of Purchasing and Supply Management (IFPSM).

The full text version of the 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 2004 data will be released at 10:00 a.m. (ET) on Monday, January 3, 2005.

The next Non-Manufacturing ISM Report On Business® featuring the December 2004 data will be released at 10:00 a.m. (ET) on Wednesday, January 5, 2005.


Back to Top