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69th Semiannual Economic Forecast

FOR RELEASE: May 10, 2005

Contact: Rose Marie Goupil
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, ext. 3015
  E-mail: rgoupil@ism.ws
Economic Growth to Continue in Second Half of 2005
Manufacturing Expansion Continues in 2005
Revenue to Grow by 6.8%
Capital Spending up 9.8%
Capacity Utilization at 86.8%
Non-Manufacturing Expansion also Continues in 2005
Revenue to Grow by 5.3%
Capital Spending up 1.4%
Capacity Utilization at 86.9%
Manufacturing Summary

Expectations for 2005 remain high as 72 percent of survey respondents forecast revenues to be greater in 2005 than in 2004. However, expectations are lower overall as the panel of purchasing and supply executives now expects a 6.8 percent net increase in overall revenues for 2005 compared to a 7.8 percent revenue growth forecast in December 2004. Industries expecting double-digit improvement in 2005 are: Primary Metals; Wood & Wood Products; Transportation & Equipment; and Electronic Components & Equipment.

Non-Manufacturing Summary

Sixty-eight percent of non-manufacturing purchasing and supply executives expect their 2005 revenues to be greater than in 2004. They currently expect a 5.3 percent net increase in overall revenues compared to a 5.9 percent increase predicted for 2005 last December. Non-manufacturing industries expecting the greatest improvement over 2004 are — listed in order — Business Services; Mining; Wholesale Trade; Construction; and Health Services.


OPERATING RATE

Manufacturing

Manufacturing purchasing and supply executives report that their companies are currently operating at 86.8 percent of normal capacity. This is an increase from December 2004 (83 percent) and greater than the rate reported in April 2004 (85.6 percent), though slightly less than the 10-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 23 consecutive months. The following eight industries are operating at or above the average capacity of 86.8 percent: Fabricated Metals; Glass, Stone & Aggregate; Petroleum; Primary Metals; Paper; Wood & Wood Products; Instruments & Photographic Equipment; and Printing & Publishing.

Non-Manufacturing

Non-manufacturing purchasing and supply executives report that their organizations are currently operating at 86.9 percent of normal capacity. This is slightly lower than the 88.2 percent reported in December 2004, but higher than the 85.4 percent reported in April 2004. Considering production capacity increases reported in the next section of this forecast, this indicates that non-manufacturing industries are continuing to add capacity and to employ it at almost the same rate. The following industries are operating at capacity levels at or above the average rate (86.9 percent): Real Estate; Transportation; Public Administration; Legal Services; Finance & Banking; Utilities; Mining; Insurance; Health Services; and Retail Trade.

Operating Rate
  Manufacturing Non-Manufacturing
  April 2004 Dec 2004 April 2005 April 2004 Dec 2004 April 2005
90%+ 48.7% 42.2% 42.8% 48% 58% 55.7%
50%-89% 48.2% 54.7% 56.2% 49% 41.3% 43.7%
Below 50% 3.1% 3.1% 1% 3% 0.7% 0.6%
Est. Overall Average 85.6% 83% 86.8% 85.4% 88.2% 86.9%


PRODUCTION CAPACITY — April 2005

Manufacturing

Production capacity is now expected to increase 6 percent in 2005. This is slightly higher than the expected increase of 5.6 percent predicted in the December 2004 forecast for 2005. Presently, 50 percent of supply executives expect an average increase of 13.6 percent, 5 percent expect decreases averaging 13.6 percent, and 45 percent expect no change. The following nine industries expect to expand at or above the average 6 percent increase: Leather; Transportation & Equipment; Tobacco; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Wood & Wood Products; Glass, Stone & Aggregate; Fabricated Metals; and Food.

Manufacturing Production Capacity
  For 2004 For 2005 For 2005
  Reported
Dec 2004
Magnitude
of Change
Predicted
Dec 2004
Magnitude
of Change
Predicted
April 2005
Magnitude
of Change
Higher 52% +11.6% 51% +13.8% 50% +13.6%
Same 39% NA 43% NA 45% NA
Lower 9% -23.6% 6% -23.9% 5% -13.6%
Net Average   +4.0%   +5.6%   +6.0%

Non-Manufacturing

The capacity to produce products or provide services in the non-manufacturing sector is expected to increase 3.5 percent during 2005. This compares to an increase of 3.1 percent reported last December for 2004 and a prediction in December 2004 of a 4.4 percent increase in 2005. For 2005, 35 percent of non-manufacturing purchasers expect their capacity to increase by an average of 10.9 percent, and 3 percent of respondents foresee their capacity decreasing by an average of 9 percent. Sixty-two percent expect no change in their capacity. The industries expecting to add more than the average 3.5 percent to their capacity are: Construction; Retail Trade; Health Services; Finance & Banking; and Wholesale Trade.

Non-Manufacturing Production or Provision Capacity
  For 2004 For 2005 For 2005
  Reported
Dec 2004
Magnitude
of Change
Predicted
Dec 2004
Magnitude
of Change
Predicted
April 2005
Magnitude
of Change
Higher 39% +9.3% 46% +10.0% 35% +10.9%
Same 57% NA 51% NA 62% NA
Lower 4% -13% 3% -12.3% 3% -9.0%
Net Average   +3.1%   +4.4%   +3.5%


PREDICTED CAPITAL EXPENDITURES — 2005 vs. 2004

Manufacturing

Supply executives expect capital expenditures to rise 9.8 percent in 2005. This is a significant increase in expectations when compared to the prediction of 1.6 percent in the December 2004 forecast for 2005. The 37 percent of respondents who predict increased capital expenditures in 2005 indicate an average increase of 40.1 percent, while the 20 percent who said their capital spending would be reduced predict an average decrease of 25.1 percent; 43 percent said they expect to spend the same in 2005 as in 2004. Industries showing the largest increases in capital expenditures for 2005 — in order of percentage increase — are: Glass, Stone & Aggregate; Primary Metals; Tobacco; Industrial & Commercial Equipment & Computers; Paper; Printing & Publishing; and Leather.

Non-Manufacturing

Non-manufacturing purchasing and supply executives are expecting to increase their level of capital expenditures 1.4 percent in 2005 compared to 2004. The 39 percent of members expecting to spend more on capital expenditures predict an average increase of 15.3 percent. An additional 21 percent anticipate a decrease averaging 22.2 percent. However, 40 percent expect to spend the same on capital expenditures in 2005 as in 2004. Industries expecting the greatest increases in capital expenditures in 2005 are: Legal Services; Retail Trade; Agriculture; Insurance; Construction; and Transportation.

Predicted Capital Expenditures 2005 vs. 2004
  Manufacturing Non-Manufacturing
  Predicted
Dec 2004
Predicted
April 2005
Magnitude
of Change
Predicted
Dec 2004
Predicted
April 2005
Magnitude
of Change
Higher 42% 37% +40.1% 42% 39% +15.3%
Same 37% 43% NA 43% 40% NA
Lower 21% 20% -25.1% 15% 21% -22.2%
Net Average +1.6%   +9.8% +1.8%   +1.4%


PRICES — Changes Between End of 2004 and April 2005

Manufacturing

After an initial forecast in December 2004 of a 4.3 percent increase in prices paid during the first four months of 2005, survey respondents report that prices are slightly above expectations. They now report an increase of 4.5 percent for the period, as the 74 percent who say their prices are higher now than at the end of 2004 report an average increase of 6.9 percent, while the 11 percent who report lower prices averaged a 6.1 percent decrease. The remaining 15 percent indicate no change between the end of 2004 and April 2005. Industries experiencing higher-than-average price increases are: Rubber & Plastic Products; Textiles; Furniture; Glass, Stone & Aggregate; Food; Chemicals; Petroleum; Primary Metals; Paper; and Printing & Publishing.

Non-Manufacturing

Non-manufacturing members report that their purchases in the first four months of 2005 cost an average of 5.1 percent more than they would have at the end of 2004. This is a relatively strong rate of increase in prices compared to recent years. Seventy-four percent of non-manufacturing purchasers report the prices they paid increased an average of 7.2 percent in the first part of 2005. Also, 5 percent report price decreases averaging 3.6 percent. The remaining 21 percent indicate no change in prices in the first four months of 2005. Industries reporting the largest increase in prices they paid in the first part of 2005 are: Retail Trade; Construction; Public Administration; Wholesale Trade; Utilities; and Real Estate.

Prices — Changes Between End of 2004 and April 2005
  Manufacturing Non-Manufacturing
  Predicted
Dec 2004
Reported
April 2005
Magnitude
of Change
Predicted
Dec 2004
Reported
April 2005
Magnitude
of Change
Higher 68% 74% +6.9% 68% 74% +7.2%
Same 19% 15% NA 25% 21% NA
Lower 13% 11% -6.1% 7% 5% -3.6%
Net Average +4.3%   +4.5% +2.7%   +5.1%


PRICES — Predicted Changes Between End of 2004 and End of 2005

Manufacturing

The forecast indicates respondents expect price increases to moderate during the period of May 2005 through December 2005 at a rate of 0.7 percent. They predict a net average increase of 5.2 percent between December 2004 and December 2005. Seventy-eight percent expect an average price increase of 7.9 percent, while 13 percent expect an average decline of 7.4 percent. The remaining 9 percent expect no change in their average prices paid for the year. Industries expecting to pay above average prices by the end of 2005 are: Textiles; Rubber & Plastic Products; Petroleum; Leather; Glass, Stone & Aggregate; Primary Metals; Apparel; Paper; Chemicals; Fabricated Metals; Printing & Publishing; and Furniture.

Non-Manufacturing

Looking out to the end of 2005, non-manufacturing purchasers expect prices they pay to increase by 5.5 percent over the entire year. Seventy-nine percent of purchasers anticipate price increases averaging 7.2 percent. Five percent of purchasers expect decreased prices with an average reduction of 2.9 percent, and 16 percent of members do not expect prices to change. Industries expecting the highest rates of price increases in 2005 are: Retail Trade; Agriculture; Wholesale Trade; Construction; Utilities; Real Estate; Communication; and Public Administration.

Prices — Predicted Changes Between End of 2004 and End of 2005
  Manufacturing Non-Manufacturing
  Predicted
Dec 2004
Predicted
April 2005
Magnitude
of Change
Predicted
Dec 2004
Predicted
April 2005
Magnitude
of Change
Higher 69% 78% +7.9% 71% 79% +7.2%
Same 15% 9% NA 19% 16% NA
Lower 16% 13% -7.4 10% 5% -2.9%
Net Average +4.4%   +5.2% +3.6%   +5.5%


EMPLOYMENT — Change in Overall Employment — Balance 2005

Manufacturing

ISM's Manufacturing Business Survey Committee members report employment growth for the balance of 2005, as members now forecast that manufacturing employment will increase 1.2 percent during the balance of 2005, with 31 percent expecting employment to be 8.6 percent higher. This is compared to the 14 percent who predict employment to be lower by 10 percent. The remaining 55 percent of members expect their employment levels to be unchanged in 2005. Industries expecting the highest increases in employment through the remainder of 2005 are: Primary Metals; Fabricated Metals; Miscellaneous*; Transportation & Equipment; Petroleum; Food; Furniture; Wood & Wood Products; Industrial & Commercial Equipment & Computers; and Rubber & Plastic Products.

Non-Manufacturing

ISM's Non-Manufacturing Business Survey Committee members forecast that employment will increase 1.3 percent during the balance of 2005. For the remaining months of 2005, 36 percent expect higher levels of employment, 10 percent of members anticipate lower levels, and 54 percent expect their employment levels to be unchanged. Industries anticipating the highest increases in their employment in the coming months of 2005 are: Construction; Retail Trade; Business Services; Legal Services; Transportation; Utilities; Insurance; Other Services*; and Wholesale Trade.

Predicted Change in Overall Employment
  Manufacturing Non-Manufacturing
  Predicted
for 2005
Dec 2004
Balance
of 2005
April 2005
Nominal
Change
Predicted
for 2005
Dec 2004
Balance
of 2005
April 2005
Nominal
Change
Higher 40% 31% +8.6% 46% 36% +5.2%
Same 46% 55% NA 44% 54% NA
Lower 14% 14% -10.0% 10% 10% -5.5%
Net Average +1.6%   +1.2% +3.1%   +1.3%
Diffusion Index 63% 58.5%   68% 63%  


BUSINESS REVENUES

Business Revenues Comparison — 2005 vs. 2004

Manufacturing

Summarizing revenues for 2005, 72 percent of survey respondents say revenues will be better than 2004, and that their nominal (before adjusting for inflation) revenues will increase an average of 11.5 percent over 2004. Conversely, 9 percent say their nominal revenues will decrease in 2005 by an average of 15.6 percent, and the remaining 19 percent indicate no change. Respondents indicate an overall net nominal increase of 6.8 percent in business revenues for 2005 over 2004. This represents a moderate decline when compared to the December 2004 forecast of a 7.8 percent increase for 2005 over 2004. Industries expecting above average increases in revenues in 2005 are: Primary Metals; Wood & Wood Products; Transportation & Equipment; Electronic Components & Equipment; Apparel; Paper; Fabricated Metals; and Chemicals.

Manufacturing Business Revenues
  2004 vs. 2003 2005 vs. 2004
  Predicted
April 2004
Nominal
% Change
Predicted
Dec 2004
Nominal
% Change
Predicted
April 2005
Nominal
% Change
Higher 81% +13% 75% +12.2% 72% +11.5%
Same 11% NA 19% NA 19% NA
Lower 8% -11.2% 6% -21.1% 9% -15.6%
Net Average   +9.7%   +7.8%   +6.8%

Non-Manufacturing

Non-manufacturing purchasers forecast that business revenues for 2005 will be improved over 2004 by 5.3 percent. This is lower than the 5.9 percent increase predicted in December 2004 for 2005 and the 6.3 percent increase forecast in April 2004 for 2004 revenues over 2003 revenues. The 68 percent of members forecasting better business in 2005 than in 2004 estimate an average nominal (before adjusting for inflation) revenue increase of 8.6 percent. This compares to an average nominal decrease of 9.3 percent forecast by the 6 percent who predict worse business in 2005. The remaining 26 percent see no change in 2005. Industries expecting the largest percent increase in revenues in 2005 are: Business Services; Mining; Wholesale Trade; Construction; Health Services; Retail Trade; Finance & Banking; Real Estate; and Utilities.

Non-Manufacturing Business Revenues
  2004 vs. 2003 2005 vs. 2004
  Predicted
April 2004
Nominal
% Change
Predicted
Dec 2004
Nominal
% Change
Predicted
April 2005
Nominal
% Change
Higher 66% +11.6% 66% +10.1% 68% +8.6%
Same 18% NA 27% NA 26% NA
Lower 16% -9.1% 7% -12.0% 6% -9.3%
Net Average   +6.3%   +5.9%   +5.3%


SUMMARY

Manufacturing
  • Operating rate is currently 86.8 percent of normal capacity.
  • Production capacity will increase 6.0 percent in 2005.
  • Capital expenditures will increase 9.8 percent in 2005.
  • Prices paid increased 4.5 percent through end of April.
  • Expect an additional 0.7 percent increase by end of 2005.
  • Manufacturing employment will increase 1.2 percent during the balance of 2005.
  • Manufacturing revenues will increase 6.8 percent in 2005.
  • Overall, manufacturing is benefiting from revenue growth and a high utilization rate, and is willing to invest through capital expansion.
Non-Manufacturing
  • Operating rate is currently 86.9 percent of normal capacity.
  • Production capacity will increase 3.5 percent in 2005.
  • Capital expenditures will increase 1.4 percent in 2005.
  • Prices paid increased 5.1 percent through end of April.
  • Expect an additional 0.4 percent increase by end of 2005.
  • Non-manufacturing employment will increase 1.3 percent during remainder of 2005.
  • Non-manufacturing revenues will increase 5.3 percent in 2005.
  • Overall, non-manufacturing is experiencing revenue growth and a high utilization rate, but is somewhat cautious about increased capital investment and expansion this year.

*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, customers' inventories, employment, buying policies and prices. The report has been issued by the association since 1931, except for a four-year interruption 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 May 2005 data will be released at 10:00 a.m. (ET) on Wednesday, June 1, 2005.

The next Non-Manufacturing ISM Report on Business® featuring the May 2005 data will be released at 10:00 a.m. (ET) on Friday, June 3, 2005.





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