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70th Semiannual Economic Forecast (continued)

FOR RELEASE: December 13, 2005

BUSINESS REVENUES

Business Revenues Comparison — 2005 vs. 2004

Manufacturing

Summarizing revenues for 2005, 71 percent say revenue was better than 2004, and that their nominal (before adjusting for inflation) revenues increased an average of 13.8 percent over 2004. Conversely, 15 percent say their nominal revenues decreased in 2005 by an average of 17.6 percent, and the remaining 14 percent indicate no change. Purchasing and supply executives indicate an overall net nominal increase of 7.3 percent in business revenues for 2005 over 2004. This is higher than the 6.8 percent increase that was forecast in May 2005 for all of 2005, and lower than the 7.8 percent increase predicted in December 2004 for all of 2005.

Manufacturing Business Revenues — 2005 vs. 2004
  Predicted
Dec 2004
Nominal
% Change
Predicted
May 2005
Nominal
% Change
Reported
Dec 2005
Nominal
% Change
Higher 75% +12.2% 72% +11.5% 71% +13.8%
Same 19% NA 19% NA 14% NA
Lower 6% -21.1% 9% -15.6% 15% -17.6%
Net Average   +7.8%   +6.8%   +7.3%

Non-Manufacturing

Non-manufacturing supply management executives report that business revenues for 2005 are improved over 2004 by 5.8 percent. This is slightly higher than the 5.3 percent increase predicted in May 2005 for 2005 but somewhat lower than the 6.4 percent increase reported one year ago for 2004 revenues over 2003 revenues. The 69 percent of members reporting better business in 2005 than in 2004 estimate an average nominal (before adjusting for inflation) revenue increase of 9.9 percent. This compares to an average nominal decrease of 9.4 percent reported by the 11 percent who indicate worse business in 2005. The remaining 20 percent have experienced no change in 2005. Industries reporting above average increases in revenues in 2005 are: Mining; Communication; Finance & Banking; Health Services; Utilities; Business Services; Wholesale Trade; Retail Trade; Insurance; Transportation; and Entertainment.

Non-Manufacturing Business Revenues — 2005 vs. 2004
  Predicted
Dec 2004
Nominal
% Change
Predicted
May 2005
Nominal
% Change
Reported
Dec 2005
Nominal
% Change
Higher 66% +10.1% 68% +8.6% 69% +9.9%
Same 27% NA 26% NA 20% NA
Lower 7% -12.0% 6% -9.3% 11% -9.4%
Net Average   +5.9%   +5.3%   +5.8%

Business Revenues Prediction for 2006

Manufacturing

Purchasers forecast that 2006 will be better than 2005. The 75 percent of members forecasting better business in 2006 than in 2005 estimate an average nominal (before adjusting for inflation) increase of 9.4 percent in their companies' revenues. This compares to an average nominal decrease of 19.8 percent forecast by the 8 percent who predict worse business in 2006. Including the 17 percent who see no change in 2006, the forecast for overall net nominal growth in business revenues for 2006 over 2005 is 5.4 percent. The industries predicting a greater than the average 5.4 percent increase in nominal revenues in 2006 are: Electronic Components & Equipment; Glass, Stone & Aggregate; Chemicals; Apparel; Fabricated Metals; Transportation & Equipment; Textiles; Rubber & Plastic Products; and Primary Metals.

Non-Manufacturing

Non-manufacturing ISM members forecast that business revenues for 2006 will be improved over 2005 by an average of 6.6 percent. This is higher than the 5.8 percent increase reported for 2005 and also higher than the 6.4 percent increase reported one year ago for 2004 revenues over 2003 revenues. The 74 percent of members forecasting better business in 2006 than in 2005 estimate an average nominal (before adjusting for inflation) revenue increase of 9.4 percent. This compares to an average nominal decrease of 6.6 percent forecast by the 4 percent who predict worse business in 2006. The remaining 22 percent see no change in 2006. Industries expecting above average increases in revenues in 2006 are: Communication; Business Services; Wholesale Trade; Retail Trade; Transportation; Construction; and Utilities.

Business: 2006 vs. 2005 Revenues
  Manufacturing Non-Manufacturing
  Predicted
Dec 2005
Nominal
% Change
Predicted
Dec 2005
Nominal
% Change
Higher 75% +9.4% 74% +9.4%
Same 17% NA 22% NA
Lower 8% -19.8% 4% -6.6%
Net Average   +5.4%   +6.6%


PROFIT MARGINS

Manufacturing

Survey respondents report that profit margins have stayed the same on average during the second and third quarters of 2005 as 37 percent experienced an increase in profit margins, an almost equal number (38 percent) had lower margins, and 25 percent reported no change. However, their expectations are for improvement between now and April of 2006. Thirty-nine percent predict better profits margins, 17 percent predict lower margins, and 44 percent predict no change.

Non-Manufacturing

Non-manufacturing supply management 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 April 2005 to September 2005 period, while 27 percent found smaller profit margins and 41 percent had no change in margins during the same period. Looking ahead over the November 2005 to April 2006 period, 29 percent of supply managers expect improved margins, only 14 percent expect lower profit margins, and the remaining 57 percent of members anticipate no change in their profit margins.

Profit Margins
  Manufacturing Non-Manufacturing
  Apr 2005
through
Sep 2005
Reported
Dec 2005
Nov 2005
through
Apr 2006
Predicted
Dec 2005
Apr 2005
through
Sep 2005
Reported
Dec 2005
Nov 2005
through
Apr 2006
Predicted
Dec 2005
Better 37% 39% 32% 29%
Same 25% 44% 41% 57%
Worse 38% 17% 27% 14%
Diffusion Index 49.5% 61% 52.5% 57.5%


BUSINESS COMPARISON

The First Half of 2006 with Last Half of 2005

Manufacturing

Looking ahead to the first half of 2006, members are optimistic about the next half year. Comparing their outlook for the first half of 2006 to the last half of 2005, 52 percent predict it will be better, 12 percent predict it will be worse, and 36 percent expect no change. Compared to the diffusion index for the same relative prediction one year ago (68.5 percent), members are more optimistic about prospects in the manufacturing sector for the first half-year (70 percent). The industries expecting above average optimism are: Apparel; Miscellaneous*; Textiles; Electronic Components & Equipment; Fabricated Metals; Transportation & Equipment; Rubber & Plastic Products; Primary Metals; Chemicals; and Food.

Non-Manufacturing

The first half of 2006 is looking better than the last half of 2005, according to non-manufacturing purchasing and supply managers. The diffusion index indicating current expectations is 69.5 percent. Forty-nine percent of members expect the first half of next year to be better than the last half of this year, 10 percent anticipate it will be worse, and 41 percent predict no change. The industries expecting the most improvement in the first half of 2006 are: Construction; Legal Services; Utilities; Entertainment; Transportation; Communication; and Mining.

Business — First Half 2006 vs. Last Half 2005
  Manufacturing Non-Manufacturing
  Predicted
Dec 2005
Predicted
Dec 2005
Better 52% 49%
Same 36% 41%
Worse 12% 10%
Diffusion Index 70% 69.5%

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 2006 with the First Half of 2006

Manufacturing

Purchasing and supply executives are slightly less optimistic about the second half of 2006 compared to the first half of the year. The proportion of members who forecast the second half of 2006 to be better than the first half is 44 percent, while 13 percent expect it to be worse, and 43 percent expect no change. Compared to the diffusion index for the same relative prediction one year ago (69 percent), members are less optimistic about prospects in the manufacturing sector for the second half of 2006 (65.5 percent). The industries predicting the largest rate of improvement in the second half of 2006 are: Instruments & Photographic Equipment; Rubber & Plastic Products; Printing & Publishing; Miscellaneous*; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Furniture; Textiles; and Chemicals.

Non-Manufacturing

Comparing the second half of 2006 to the first half, non-manufacturing purchasing and supply executives feel slightly less optimism than they do for the first half of the year compared to the last half of 2005 (diffusion index of 68 percent compared to 69.5 percent). The proportion of members who currently forecast the second half of 2006 to be better than the first half is 43 percent, while 7 percent expect it to be worse. An additional 50 percent of purchasers expect no change. The industries expecting the greatest improvement in the second half of the year are: Legal Services; Health Services; Retail Trade; Construction; and Mining.

Business — Second Half 2006 vs. First Half 2006
  Manufacturing Non-Manufacturing
  Predicted
Dec 2005
Predicted
Dec 2005
Better 44% 43%
Same 43% 50%
Worse 13% 7%
Diffusion Index 65.5% 68%

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 2006

Manufacturing

In response to a special question regarding supply chain optimization, 74 percent of purchasing and supply executives plan to take new steps in 2006 to improve their supply chain management practices. New or improved enterprise technology is at the top of the list for 2006. Improved forecasting and planning is second on the list. Supplier consolidation; improved inventory management; and application of lean manufacturing concepts to supply chain are the other major issues of concern to supply managers. The five most popular approaches are listed below:

  1. New or improved enterprise technology
  2. Improved forecasting and planning
  3. Supplier consolidation
  4. Improved inventory management
  5. Application of lean manufacturing concepts to supply chain
Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2006, 71 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 application of new and/or improved technology. Following that preference, members indicated supplier consolidation and increased use of e-procurement processes as their second and third choices. The five most popular approaches are listed below:

  1. Application of new and/or improved technology
  2. Supplier consolidation
  3. Increased use of e-procurement processes
  4. Improved/revised supplier relationships
  5. Improvements in supply chain processes

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers will be decreasing inventory on hand to support their planned level of sales during 2006. In this forecast, 16 percent expect to increase their purchased inventory-to-sales ratio during 2006. This compares to 23 percent who expect the ratio to decrease and 61 percent who predict no change.

Non-Manufacturing

Of the 64 percent of non-manufacturing purchasers who answered this question, 14 percent anticipate increasing their purchased inventory-to-sales ratio during 2006. An additional 12 percent expect their ratio to drop and 74 percent see no change. The diffusion index of 51 percent suggests continued building of inventories in 2006 but at a relatively slow rate of increase.

Predicted Change in Purchased Inventory-to-Sales Ratio
  Manufacturing Non-Manufacturing
  For 2005
Predicted
Dec 2004
For 2006
Predicted
Dec 2005
For 2005
Predicted
Dec 2004
For 2006
Predicted
Dec 2005
Greater 20% 16% 14% 14%
Same 65% 61% 76% 74%
Smaller 15% 23% 10% 12%
Diffusion Index 52.5% 46.5% 52% 51%

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.


ECONOMIC CONCERNS

Manufacturing

Purchasers have a number of supply- and cost-related concerns on their list for 2006. They responded decidedly that energy cost and supply is their major concern as it has implications to almost every manufacturer. This concern is reinforced as they selected oil and petroleum-based products as their second concern, and inflation in the cost of goods and services as their third concern, followed by labor and benefits costs, and continuity of supply and shortages. The top five responses are:

Economic Concerns for Manufacturing Sector

  1. Energy Cost and Supply
  2. Oil and Petroleum-Based Products
  3. Inflation
  4. Labor and Benefits Costs
  5. Continuity of Supply and Shortages
Non-Manufacturing

The number one economic concern of non-manufacturing supply management executives at the present time is energy cost and supply. Other concerns include: price increases and inflation other than energy; employment labor and benefit costs, higher interest rates; and continuity of supply and shortages. The top five responses in order of importance are:

Economic Concerns for Non-Manufacturing Sector

  1. Energy Cost and Supply
  2. Price Increases and Inflation
  3. Labor and Benefits Costs
  4. Higher Interest Rates
  5. Continuity of Supply and Shortages

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Respondents are optimistic about the next 12 months, but not as bullish when compared to their response in December 2004. The 57 percent who report a better outlook is less than the 63 percent response received in December 2004. The 35 percent who report that the outlook is the same is up from the 28 percent reported in December 2004, and the 8 percent who indicated the outlook to be worse is lower than the 9 percent reported in December 2004.

Non-Manufacturing

Despite the prediction in an earlier section of this report of a 5.8 percent increase in revenues in 2005, non-manufacturing survey members' organizations have a lower degree of optimism now than they had when they looked ahead in both December 2004 and December 2003. The 43 percent who currently report a better outlook is much lower than the 63 percent who had that outlook in December 2004 and the 64 percent who had a better outlook in December 2003. Forty-seven percent expect no change in the outlook and 10 percent feel the outlook will be worse over the next 12 months.

Outlook — Next 12 Months
  Manufacturing Non-Manufacturing
  Predicted
for 2005
Dec 2004
Predicted
for 2006
Dec 2005
Predicted
for 2005
Dec 2004
Predicted
for 2006
Dec 2005
Better 63% 57% 63% 43%
Same 28% 35% 33% 47%
Worse 9% 8% 4% 10%
Diffusion Index 77% 74.5% 79.5% 66.5%


U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2006 — Manufacturing Only

Manufacturing

Purchasing and supply executives remain moderately optimistic concerning the prospective strength of the U.S. dollar for 2006. The average diffusion index for this forecast is 59.6 percent, stronger than the December 2004 forecast average of 53.3 percent. Of the seven currencies surveyed in the report, the U.S. dollar is expected to strengthen most against NAFTA trading partners Canada and Mexico.

U.S. Dollar Will Be: Euro Can.
$
British
Pound
Japanese
Yen
Mexican
Peso
Korean
Won
Taiwan
$
Stronger than 53% 45% 37% 40% 51% 31% 31%
Same as 19% 40% 39% 35% 29% 48% 48%
Weaker than 28% 15% 24% 25% 20% 21% 21%
Diffusion Index 62.5% 65% 56.5% 57.5% 65.5% 55% 55%

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 80 percent of respondents indicate they are less than three-fourths complete in achieving benefits from applying technology. Of the 80 percent, 46 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 in manufacturing.

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 51.8 percent, indicating that, on average, almost 50 percent of potential improvement is yet to be gained. While 30 percent of respondents have achieved at least 75 percent of their expected potential benefit, the remaining 70 percent still have significant benefits to gain.

Benefits of Applying Technology
% Benefits
Realized to Date
Manufacturing
% of Responses
Non-Manufacturing
% of Responses
90-100 2% 4%
75-89 18% 26%
50-74 34% 36%
Less than 50 46% 34%


SUMMARY

Manufacturing

The manufacturing sector is currently expanding, and the forecast indicates that it will continue to expand in 2006.

  • Operating rate is 85.3 percent.
  • Production capacity will increase by 5.3 percent in 2006.
  • Capital expenditures increased 19 percent in 2005.
  • Capital expenditures will increase 9 percent in 2006.
  • Prices paid increased 6.4 percent in 2005.
  • Overall 2006 prices will increase 3.8 percent.
  • Labor and benefit costs will increase 2.7 percent in 2006.
  • Manufacturing employment will increase 1.3 percent in 2006.
  • The U.S. dollar is expected to strengthen versus major trading partner currencies in 2006.
  • Expect strong growth in U.S. exports in 2006.
  • Expect strong growth in U.S. imports in 2006.
  • Manufacturing revenues (nominal) are up by 7.3 percent in 2005.
  • Manufacturing revenues (nominal) will be up by 5.4 percent in 2006.
  • Major concerns to manufacturers: energy cost and supply; oil and petroleum-based products; inflation; labor and benefits costs; and continuity of supply and shortages.
  • Overall attitude of manufacturing management: optimistic, with 57 percent indicating 2006 will be better than 2005.
Non-Manufacturing

The non-manufacturing sector continues to expand and the forecast indicates an increased rate of expansion in 2006.

  • Operating rate is currently 87 percent.
  • Production and provision capacity will increase 3.7 percent in 2006.
  • Capital expenditures increased 5.3 percent in 2005.
  • Capital expenditures will increase 11.1 percent in 2006.
  • Prices paid increased 5.3 percent during 2005.
  • Prices paid will increase 4 percent during 2006.
  • Labor and benefit costs will increase 3.6 percent during 2006.
  • Non-manufacturing employment will increase 2.3 percent during 2006.
  • Expect strong export growth by non-manufacturing exporters in 2006.
  • Expect strong import growth by non-manufacturing importers in 2006.
  • Non-manufacturing revenues (nominal) are up 5.8 percent in 2005.
  • Non-manufacturing revenues (nominal) will rise 6.6 percent in 2006.
  • Major concerns to non-manufacturers: energy cost and supply; price increases and inflation; labor and benefits costs; higher interest rates; and supply continuity and shortages.
  • Overall attitude of non-manufacturing supply managers: optimistic, but less so than 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 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 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, imports, exports, backlog of orders, employment, customers' inventories, buying policies 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 Report On Business® is 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.

The full text version of each report 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 2005 data will be released at 10:00 a.m. (ET) on Tuesday, January 3, 2006.

The next Non-Manufacturing ISM Report On Business® featuring the December 2005 data will be released at 10:00 a.m. (ET) on Thursday, January 5, 2006.



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