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December 2001 Non-Manufacturing ISM Report On Business®

FOR RELEASE: January 4, 2002

CONTACT:   Kristen Kioa
    ISM Media Relations
    800/888-6276, ext. 3015
Business Activity at 54.2%

DO NOT CONFUSE THIS NATIONAL NON-MANUFACTURING REPORT with the various regional purchasing and supply reports released across the country or the Manufacturing ISM Report On Business®. The national non-manufacturing report's information reflects the entire United States, while the regional reports cover only their local vicinity. Also, the information in the regional reports is not used in calculating the results of the national report. The information compiled in this report is for the month of December 2001.

New Orders and Exports Increase
Order Backlogs and Employment Decrease More Slowly
Inventories and Prices Decrease

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased more strongly in December 2001 say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Ralph G. Kauffman, Ph.D., C.P.M., chair of the Institute for Supply Management's™ Non-Manufacturing Business Survey Committee and coordinator of the purchasing and supply management program, University of Houston-Downtown. "In December, ISM's Non-Manufacturing Business Activity Index indicated an increase growth for the second consecutive month," Kauffman said. He also added, "This second month of non-manufacturing growth, and at a higher rate of growth than in November, appears to indicate that November's growth was not entirely due to a rebound from October's low point following the events of September 11th. Also this month, increases were recorded by six of the Report's nine other indexes. Of the Report's 10 indexes, six are primarily activity-oriented: Business Activity, New Orders, Backlog of Orders, Export Orders, Imports, and Employment. Of these, in addition to Business Activity, New Orders, Export Orders, and Imports registered increases in December and Backlog of Orders and Employment decreased more slowly than in November. The Inventory Sentiment Index, which had risen to a near record high in October, eased again in December but still indicated relatively strong feelings by members that they have more inventory than they would like to have. Supplier Deliveries indicated slower performance for the fourth month, again with a number of comments about transportation delays stemming from the September 11th events. After three months of recording the highest rate of decline in New Orders, the Transportation sector had the second highest rate of increase in New Orders for December."

"ISM's Non-Manufacturing Business Activity Index registered 54.2 percent in December, 2.9 percentage points higher than in November, indicating continued growth in non-manufacturing economic activity. Reports from purchasing and supply executives indicate 11 industry groups contracted or had no change from November, while six indicated growth in December. Increased business activity in December was reported by 21 percent of members, compared to 23 percent in November. Reduced activity was reported by 27 percent of members compared to 25 percent in November. In December the remaining 52 percent of members indicated no change in business activity, the same proportion as in November," said Kauffman.

"Overall in December, non-manufacturing industries experienced a second month of growth in business activity following the dramatic drop-off of activity in October. Four activity-oriented indexes recorded growth in December, with two indicating contraction. The Prices Index remained at a record low level for the second consecutive month, indicating very little inflationary pressure on non-manufacturing industries at the present time," Kauffman commented.

Significant reports of commodities in short supply, or up or down in price in December included only one commodity in short supply, Pharmaceuticals. Also, only one commodity, Pork, was reported increasing in price (there were also some reports of price increases for Beef but there were more reports of price decreases than of increases). Price reductions were reported for 18 commodities, with the highest number of reports for Computers (PCs), Beef, Diesel Fuel, Fuel, Gasoline, and Office Supplies.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index December
Index %
November
Index %
Index Change
from December
Direction &
Rate of Change
December
Index %
November
Index %
Index Change
from December
Business Activity / Production 54.2 51.3 +2.9 Increasing Faster 50.6 47.1 +3.5
New Orders 52.6 48.3 +4.3 Increasing from Decreasing 54.9 48.8 + 6.1
Employment 45.1 44.3 +0.8 Decreasing Slower 40.5 35.7 +4.8
Supplier Deliveries 53.5 52.5 +1.0 Slowing Slower 48.0 47.3 +0.7
Inventories 48.5 49.5 -1.0 Decreasing Faster 37.7 37.9 -0.2
Prices 38.5 38.5 0.0 Unchanged 34.7 31.6 +3.1
Backlog of Orders 46.5 42.0 +4.5 Decreasing Slower 39.5 38.5 +1.0
New Export Orders 55.0 48.5 +6.5 Increasing from Decreasing 48.0 49.3 -1.3
Imports 57.9 52.4 +5.5 Increasing Faster 50.9 49.8 +1.1
Inventory Sentiment 66.5 67.0 -0.5 Decreased Feeling of "too high" N/A    

* Manufacturing ISM Report On Business® data is seasonally adjusted except for Backlog of Orders. Non-Manufacturing ISM Report On Business®data is seasonally adjusted for Business Activity, New Orders, Imports, and Employment.

Business Activity

ISM's Non-Manufacturing Business Activity Index in December rose 2.9 percentage points to 54.2 percent from November's 51.3 percent. The December Business Activity Index is at its highest level since December 2000 (61.1 percent). In December, six sectors reported increased business activity, eight sectors reported decreased activity, and three sectors indicated no change in activity from November. The percent of members reporting increased activity in December was 21 percent compared to 23 percent in November. Members reporting decreased activity was 27 percent in December, compared to 25 percent in November. Those reporting no change in activity in December totaled 52 percent, the same as in November.

The industries reporting the highest rates of growth of business activity in December were: Legal Services; Health Services; Business Services; Entertainment; and Insurance. The industries reporting the highest rates of contraction of business activity in December were: Wholesale Trade; Finance and Banking; Real Estate; Public Administration; and Construction.

Business
Activity
% Higher % Same % Lower Index
December 2001 21 52 27 54.2
November 2001 23 52 25 51.3
October 2001 17 46 37 40.6
September 2001 26 51 23 50.2

New Orders

ISM's Non-Manufacturing New Orders Index increased to 52.6 percent in December from 48.3 percent in November. The December Index reversed five months of decreases in New Orders and was the highest New Orders Index since June 2001 (53.1 percent). Comments from members included: "Increased demand"; "Seasonal and promotions selling higher pieces at lower margins," "Slowdown in sales activity," and "Year-end contract volume continued with deep year-end discounts being offered by suppliers."

The industries reporting the highest rates of growth of new orders in December were: Legal Services; Transportation; Agriculture; Business Services; and Entertainment. The industries reporting the highest rates of contraction of new orders in December were: Utilities; Mining; Real Estate Construction; and Wholesale Trade.

New Orders % Higher % Same % Lower Index
December 2001 21 52 27 52.6
November 2001 20 53 27 48.3
October 2001 17 46 37 40.4
September 2001 24 54 22 49.8

Employment

Employment in the non-manufacturing sector contracted in December for the 10th consecutive month. ISM's Non-Manufacturing Employment Index for December was 45.1 percent compared to 44.3 percent in November. Comments from members included: "Continue reduction of staff — low revenue," "Reduction in work force," "Layoffs to get expenses in line with revenue," and "Early retirement incentives."

The industries reporting growth in employment in December were: Health Services and Retail Trade. Industries reporting the highest rates of reduction in employment in December were: Insurance; Wholesale Trade; Finance and Banking; Utilities; Agriculture, and Public Administration.

Employment % Higher % Same % Lower Index
December 2001 11 65 24 45.1
November 2001 11 67 22 44.3
October 2001 9 68 23 43.5
September 2001 12 66 22 46.7

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the fourth consecutive month in December, registering an index value of 53.5 percent, one percentage point above November's 52.5 percent. Comments from purchasing and supply executives concerning supplier deliveries in December included: "Holiday season delays at USPS," "Due to flight delays because of 9/11," "Cannot keep up with demand," and "Holiday changes/personnel."

The industries that reported the highest rates of slowness of supplier deliveries in December were: Legal Services; Utilities; Entertainment; Business Services; and Construction. The industries that reported faster supplier deliveries in December were: Finance and Banking, and Wholesale Trade.

Supplier
Deliveries
% Higher % Same % Lower Index
December 2001 3 87 10 53.5
November 2001 7 81 12 52.5
October 2001 5 83 12 53.5
September 2001 5 88 7 51.0

Inventories

Material inventories maintained by non-manufacturing organizations decreased in December for the 14th consecutive month at a slightly faster rate than in November. ISM's Non-Manufacturing Inventories Index registered 48.5 percent in December, a decrease of 1 percentage point from the 49.5 percent reported in November. Of the total respondents in December, 28 percent indicated they do not have inventories. Comments from members included: "Serious effort to reduce inventory"; "Continuing assertive efforts to rid warehouse of slow stock"; "Not restocking to earlier levels"; and "Continuing to reduce inventory, especially aged and discontinued stock."

The industries reporting the highest rates of inventory increase in December were: Legal Services; Retail Trade; Finance and Banking; Business Services; and Communication. Industries reporting the highest rates of inventory decrease in December were: Agriculture; Transportation; Real Estate; Construction; and Public Administration.

Inventory
Change
% Higher % Same % Lower Index
December 2001 20 57 23 48.5
November 2001 22 55 23 49.5
October 2001 23 50 27 48.0
September 2001 16 57 27 44.5

Prices

Prices paid by non-manufacturing organizations for purchased materials and services dropped in December for the sixth consecutive month, indicating continued downward pressure on prices. ISM's Non-Manufacturing Prices Index for December is 38.5 percent, the same as in November and remaining at the lowest level recorded by this index since inception of ISM's non-manufacturing business survey in July 1997. The percentage of members reporting higher prices decreased 2 percentage points to 4 percent in December, the proportion indicating no change rose 4 percentage points to 69 percent, and the number who noted lower prices decreased 2 percentage points to 27 percent.

No industries reported increases in prices paid in December. The industries that reported the highest rates of price decreases in December were: Finance and Banking; Entertainment; Business Services; Real Estate; Insurance; and Retail Trade.

Prices % Higher % Same % Lower Index
December 2001 4 69 27 38.5
November 2001 6 65 29 38.5
October 2001 7 69 24 41.5
September 2001 12 74 14 49.0

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 46.5 percent in December. This is the 12th consecutive monthly decline in order backlogs. The December index is an increase of 4.5 percentage points from November's 42 percent. Purchasing and supply executive' comments on backlogs of orders included: "Distribution centers over capacity," "Economy and activity for our products are on the increase," "Looking better," and "Catching up." Of the total respondents in December, 33 percent indicated they do not measure backlog of orders.

The industries reporting growth of backlog of orders in December were: Legal Services; Entertainment; Business Services; Real Estate; and Public Administration. The industries reporting the highest rates of decline of order backlogs in December were: Agriculture; Finance and Banking; Transportation; Construction; Communication; and Wholesale Trade.

Backlog
of Orders
% Higher % Same % Lower Index
December 2001 12 69 19 46.5
November 2001 11 62 27 42.0
October 2001 7 67 26 40.5
September 2001 13 71 16 48.5

New Export Orders

Orders and requests for services and other non-manufacturing activities to be provided outside of the United States by domestically-based personnel increased in December after two months of decreases. The New Export Orders Index for December was 55 percent compared to November's 48.5 percent. Of the total respondents in December, 73 percent indicated they either do not perform, or do not separately measure, orders for work outside the United States.

The industries reporting increases in new export orders in December were: Public Administration; *Other Services; Wholesale Trade; Business Services; and Communication. Industries reporting decreases in new export orders in December were: Entertainment; Retail Trade; and Construction.

New Export
Orders
% Higher % Same % Lower Index
December 2001 21 68 11 55.0
November 2001 12 73 15 48.5
October 2001 13 63 24 44.5
September 2001 16 75 9 53.5

Imports

Use of imported materials by non-manufacturing industries increased in December for the second consecutive month. ISM's Non-Manufacturing Imports Index for December was 57.9 percent, an increase of 5.5 percentage points from the 52.4 percent reported in November. In December, 67 percent of respondents reported that they do not use or do not track use of imported materials.

The industries reporting the highest rates of increase in use of imports in December were: Transportation; Utilities; Health Services; Wholesale Trade; and Business Services. Industries reporting decreased use of imports in December were: Entertainment and Communication.

Imports % Higher % Same % Lower Index
December 2001 17 74 9 57.9
November 2001 13 75 12 52.4
October 2001 11 77 12 49.8
September 2001 17 79 4 55.0

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in December registered 66.5 percent compared to 67 percent for November. This decrease in the index level indicates that non-manufacturing purchasing and supply executives felt a lesser degree of discomfort with current levels of inventory in December than they did during November. December's lower index marks the second month of decline in this index. In December, 37 percent of members felt their inventories were too high (38 percent in November). Also in December, 4 percent indicated their inventories were too low (same percentage as in November), and 59 percent said that their inventories were about right (58 percent in November).

The industries that reported the highest rates of feeling that their inventories were "too high" in December were: Legal Services; Mining; Insurance; Wholesale Trade; and Communication. No industry reported its inventories were too low.

Inventory
Sentiment
% Too High % About Right % Too Low Index
December 2001 37 59 4 66.5
November 2001 38 58 4 67.0
October 2001 40 57 3 68.5
September 2001 35 58 7 64.0

*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.

Commodities Reported in Short Supply

Pharmaceuticals — 2nd month.

Commodities Reported Up in Price

Pork.

Commodities Reported Down in Price

Beef — 2nd month (some reports of price increases); Caustic Soda; Cheese — 2nd month; Coffee; Computers (PCs) — 22nd month; Copper Products — 3rd month; Diesel Fuel — 3rd month; Energy; Fuel — 3rd month; Gasoline — 3rd month; Labor; Lumber; Natural Gas — 5th month; Office Supplies; Paper — 2nd month; Plywood; Software; Steel.

Data and Method of Presentation

The Non-Manufacturing ISM Report On Business® is based on data compiled from monthly replies to questions asked of more than 370 purchasing and supply executives in over 62 different industries representing nine divisions from the Standard Industrial Classification (SIC) categories. Membership of the Business Survey Committee is diversified by SIC category and is based on each industry's contribution to Gross Domestic Product (GDP).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment, and Supplier Deliveries), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher and slower for Supplier Deliveries) and the negative economic direction (lower and faster for Supplier Deliveries). Responses represent raw data and are never changed. Data is seasonally adjusted for Business Activity, New Orders, Imports, and Employment. The remaining indexes have not indicated significant seasonality.

A weighted composite index similar to the PMI that is so popular in the Manufacturing ISM Report On Business® is not available. Several years of data will need to be developed before that type of non-manufacturing indicator can be developed. Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index reading above 50 percent indicates that the non-manufacturing economy in that index is generally expanding; below 50 percent, that it is generally declining. Supplier Deliveries is an exception. A Supplier Deliveries index above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

The Non-Manufacturing ISM Report On Business® is published monthly by the Institute for Supply Management™, the largest supply management research and education organization in the United States. The Institute for Supply Management™, established in 1915, is the world's leading educator of supply management professionals and is a valuable resource for decision makers in major markets, companies, and government. In May 2001 the membership of NAPM voted to change the association's name from the National Association of Purchasing Management to the Institute for Supply Management™ to reflect the increasing strategic and global significance of supply management. For further information, see the ISM Web site at www.ism.ws.

The full text version of the Non-Manufacturing ISM Report On Business® is posted on ISM's Web site at www.ism.ws on the third business day of every month after 10:10 a.m. (ET).

The next Non-Manufacturing ISM Report On Business® featuring the January 2002 data will be released at 10:00 a.m. (ET) on February 5, 2002.



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