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May 2004 Non-Manufacturing ISM Report On Business®

FOR RELEASE: June 3, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015
Business Activity at 65.2%

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 May 2004.

New Orders, Order Backlogs, Employment, Imports, Prices, Exports, Inventories Increase

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in May 2004, 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™ Non-Manufacturing Business Survey Committee and coordinator of the purchasing and supply management program, University of Houston-Downtown. "Non-manufacturing Business Activity increased for the 14th consecutive month in May," Kauffman said. He added, "Also in May, New Orders, Order Backlogs, Employment, Imports, Prices, Exports and Inventories increased."

Purchasing and supply executives report that business activity continued to increase in May in the non-manufacturing sector, but the rate of increase was somewhat slower than in April. The Business Activity Index for May is 65.2 percent, down 3.2 percentage points from April's 68.4 percent. May's index indicates continued growth across almost all non-manufacturing industries. In May, 15 industry groups reported growth, and one indicated contraction. Increased business activity in May was reported by 40 percent of members, compared to 46 percent in April. Reduced activity was reported by 9 percent of members, compared to 8 percent in April. In May, the remaining 51 percent of members indicated no change in business activity, compared to 46 percent that reported no change in April.

The Backlog of Orders Index increased by 3 percentage points to 56.5 percent, indicating growth in order backlogs for the 13th consecutive month and at a faster rate of increase than in April. The May New Orders Index decreased from 65.6 percent in April to 61.3 percent in May. This indicates a slower rate of increase of new orders in May compared to April. Members reported that the prices they pay increased in May for the 26th consecutive month, at a considerably faster rate of increase than in April. May's Prices Index is 74.4 percent, a rise of 5.8 percentage points from the 68.6 percent reported in April. This month, 55 percent of members across 16 industries reported paying higher prices compared to April. Many members' comments concerning business in May indicate continued positive business conditions, but with some concern about inflationary pressures. Specific comments include: "Business is definitely looking up. However, rapidly increasing prices may dampen the recovery a bit"; "Rampant inflation in raw materials and energy"; "Business activity improving following modest improvement in first quarter"; "The spring business has been robust and profitable"; and "Business continues to be very strong."

In addition, Inventories increased for the third consecutive month. With regard to Inventory Sentiment for May, members reported a higher level of concern than in April that inventories are too high. New Export Orders increased for the 10th consecutive month, Imports increased for the 13th consecutive month, and Employment increased for the eighth consecutive month. Supplier Deliveries indicated slower performance for the 33rd consecutive month.

Significant reports of commodities in short supply or up or down in price in May indicate that cement and cement products; nickel; pork ribs; steel; steel items; and wire are in short supply. Price increases are reported for airfares; aluminum and aluminum products; asphalt products; beef; cable; cheese; chicken; construction materials; construction contractor services; copper; corrugated; cut sheet paper; dairy and dairy products; #2 diesel fuel; electricity; food products; freight; fuel; fuel surcharges; gasoline; #2 heating oil; laboratory supplies; lumber; metals; metal products; milk; natural gas; paper; paper products; petroleum; petroleum-based products; plastic; plastic bags; pork and pork products; poultry; PVC/PVC pipe and fittings; roof shingles; stainless steel products; steel; steel products (large variety); steel-related products; transformers; transportation; and unleaded gasoline. Copper products and personal computers are reported down in price.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index May
Index %
April
Index %
Index
Change
from April
Direction
& Rate of
Change
May
Index %
April
Index %
Index
Change
from April
Business Activity / Production 65.2 68.4 -3.2 Increasing slower 64.8 67.0 -2.2
New Orders 61.3 65.6 -4.3 Increasing slower 62.8 65.0 -2.2
Employment 56.3 54.5 +1.8 Increasing faster 61.9 57.8 +4.1
Supplier Deliveries 56.0 58.0 -2.0 Slowing slower 69.4 67.1 +2.3
Inventories 54.0 56.5 -2.5 Increasing slower 49.3 44.8 +4.5
Prices 74.4 68.6 +5.8 Increasing faster 86.0 88.0 -2.0
Backlog of Orders 56.5 53.5 +3.0 Increasing faster 63.0 66.5 -3.5
New Export Orders 52.0 62.0 -10.0 Increasing slower 60.6 61.0 -0.4
Imports 59.5 60.5 -1.0 Increasing slower 59.8 58.5 +1.3
Inventory Sentiment 60.0 58.0 +2.0 Greater feeling of "too high" N/A N/A N/A
Customers' Inventories N/A N/A N/A   37.0 40.5 -3.5

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

Business Activity

ISM's Non-Manufacturing Business Activity Index in May slipped to 65.2 percent from April's 68.4 percent, indicating a slower rate of growth of activity in May. With the exception of March 2003, growth in business activity has been reported by ISM members every month beginning with February 2002. This month, 15 sectors reported increased business activity, one reported decreased activity, and none reported unchanged activity compared to April.

The industries reporting the highest rates of growth of business activity in May are: Real Estate; Mining; Business Services; Transportation; and Other Services*. The one industry reporting contraction of business activity in May is Entertainment.

Business
Activity
% Higher % Same % Lower Index
May 2004 40 51 9 65.2
April 2004 46 46 8 68.4
March 2004 42 48 10 65.8
February 2004 35 52 13 60.8

New Orders

ISM's Non-Manufacturing New Orders Index dropped to 61.3 percent in May from 65.6 percent in April. This indicates continued expansion of new orders but at a slower rate of growth than in April. Comments from members include: "Pickup in work activities generated by…merger"; "Technology requests are higher"; "Residential is soft but the commercial market is strong"; and "Capital spending."

The industries reporting the highest rates of growth of new orders in May are: Real Estate; Mining; Communication; Transportation; and Health Services. The one industry reporting contraction of new orders in May is Entertainment.

New
Orders
% Higher % Same % Lower Index
May 2004 37 52 11 61.3
April 2004 42 49 9 65.6
March 2004 36 54 10 62.8
February 2004 34 54 12 60.3

Employment

Employment in the non-manufacturing sector in May expanded for the eighth consecutive month after decreasing slightly in September 2003. ISM's Non-Manufacturing Employment Index for May is 56.3 percent compared to 54.5 percent in April. May's Employment Index indicates that non-manufacturing employment expanded at a faster rate in May than in April. Comments from respondents include: "Improved economy"; "Better economy allows more hires"; "Turnover and increased business activity"; "New restaurant openings"; and "Added personnel due to acquisition."

The industries reporting the highest rates of growth in employment in May are: Construction; Real Estate; Public Administration; Communication; and Health Services. The industries reporting reduction in employment in May are: Agriculture; Entertainment; Business Services; Insurance; and Retail Trade.

Employment % Higher % Same % Lower Index
May 2004 23 68 9 56.3
April 2004 21 70 9 54.5
March 2004 17 75 8 53.9
February 2004 16 70 14 52.7

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 33rd consecutive month in May. The index registered 56 percent, 2 percentage points lower than in April. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in May include: "Some trucking problems"; "Longer leadtimes on steel, aluminum and copper"; "Inventories cannot catch up"; and "Suppliers cannot keep up with increased demand."

The industries reporting the highest rates of slowing in supplier deliveries in May are: Wholesale Trade; Entertainment; Communication; Mining; and Construction. The industries reporting faster supplier deliveries in May are: Business Services and Finance & Banking.

Supplier
Deliveries
% Slower % Same % Faster Index
May 2004 15 82 3 56.0
April 2004 19 78 3 58.0
March 2004 14 82 4 55.0
February 2004 15 81 4 55.5

Inventories

ISM's Non-Manufacturing Inventories Index registered 54 percent in May, 2.5 percentage points lower than the 56.5 percent reported in April. May's index indicates the third consecutive monthly increase in material inventories maintained by non-manufacturing organizations after two consecutive monthly decreases. Of the total respondents in May, 28 percent indicate they do not have inventories or do not measure them. Comments from members include: "Using up current inventory"; "Increased demand"; "Building inventory for seasonal sales later this year"; and "Currently increasing inventories to support new stores."

The industries reporting the highest rate of inventory increases in May are: Construction; Agriculture; Real Estate; Insurance; and Other Services*. The industries reporting inventory decreases in May are: Entertainment; Mining; and Business Services.

Inventory
Change
% Higher % Same % Lower Index
May 2004 25 58 17 54.0
April 2004 28 57 15 56.5
March 2004 19 65 16 51.5
February 2004 18 62 20 49.0

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased in May for the 26th consecutive month (based on seasonal adjustments released in January 2004) and at a faster rate of increase than in April. ISM's Non-Manufacturing Prices Index for May jumped to 74.4 percent, up 5.8 percentage points from the 68.6 percent registered for April. In May, the percentage of members reporting higher prices increased 2 percentage points to 55 percent from 53 percent in April, the proportion indicating no change dropped 2 percentage points to 42 percent, and the number who noted lower prices remained at 3 percent.

The industries reporting the highest rates of increase in prices paid in May are: Agriculture; Construction; Wholesale Trade; Real Estate; and Utilities. No industry is reporting price decreases in May.

Prices % Higher % Same % Lower Index
May 2004 55 42 3 74.4
April 2004 53 44 3 68.6
March 2004 43 54 3 65.7
February 2004 31 60 9 57.3

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 56.5 percent in May. This is an increase of 3 percentage points from April's 53.5 percent and represents the 13th consecutive month of growth in order backlogs. Of the total respondents in May, 40 percent indicated they do not measure backlog of orders. Purchasing and supply executives' comments on backlogs of orders include: "Increased business activities"; "Commercial backlogs are exceeding 60-90 days. Residential backlogs are weak, 5-7 days"; "Steel shortage"; and "Steel, aluminum and copper deliveries."

The industries reporting the highest rates of growth in backlog of orders in May are: Construction; Real Estate; Mining; Transportation; and Utilities. The industries reporting a decline of order backlogs in May are: Retail Trade and Business Services.

Backlog
of Orders
% Higher % Same % Lower Index
May 2004 21 71 8 56.5
April 2004 20 67 13 53.5
March 2004 18 69 13 52.5
February 2004 17 72 11 53.0

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 for the 10th consecutive month in May. The New Export Orders Index for May is 52 percent compared to April's 62 percent, indicating a dramatically slower rate of growth in May compared to April. Of the total respondents in May, 79 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 May are: Communication; Mining; Business Services; and Other Services*. The industries reporting decreases in new export orders in May are: Transportation; Retail Trade; and Wholesale Trade.

New Export
Orders
% Higher % Same % Lower Index
May 2004 15 74 11 52.0
April 2004 27 70 3 62.0
March 2004 16 71 13 51.5
February 2004 23 65 12 55.5

Imports

In May, the ISM Imports Index registered 59.5 percent, one percentage point lower than the 60.5 percent reported in April. This indicates that use of imported materials by non-manufacturing industries increased at a slightly slower rate in May than in April. May's index marks the 13th consecutive month of import growth after the April 2003 index value of 50 percent indicated no change in imports compared to March 2003. In May, 68 percent of respondents reported that they do not use or do not track use of imported materials.

The industries reporting increases in the use of imports in May are: Construction; Business Services; Wholesale Trade; Other Services*; and Retail Trade. The one industry reporting decreased use of imports in May is Transportation.

Imports % Higher % Same % Lower Index
May 2004 27 65 8 59.5
April 2004 25 71 4 60.5
March 2004 27 67 6 60.5
February 2004 25 67 8 58.5

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in May registered 60 percent, a 2 percentage point increase from 58 percent reported in April. This indicates that non-manufacturing purchasing and supply executives feel more discomfort with current levels of inventory in May than they did during April. In May, 30 percent of respondents felt their inventories were too high, 10 percent indicated their inventories were too low, and 60 percent said that their inventories were about right.

The industries reporting the highest rates of feeling that their inventories are too high in May are: Construction; Mining; Insurance; Health Services; and Communication. Entertainment is the only industry reporting that its inventories are too low in May.

Inventory
Sentiment
%
Too
High
%
About
Right
%
Too
Low
Index
May 2004 30 60 10 60.0
April 2004 26 64 10 58.0
March 2004 26 69 5 60.5
February 2004 26 64 10 58.0

*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

Cement/Cement Products; Nickel; Pork Ribs; Steel — 4th month; Steel Products — 3rd month; Wire.

Commodities Reported Up in Price

Air Fares — 2nd month; Aluminum/Aluminum Products — 5th month; Asphalt Products; Beef — 2nd month; Cable — 2nd month; Cheese — 2nd month; Chicken — 2nd month; Construction Materials; Construction Contractor Services; Copper — 9th month; Corrugated; Cut Sheet Paper; Dairy and Dairy Products — 2nd month; #2 Diesel Fuel — 6th month; Electricity — 2nd month; Food Products; Freight; Fuel — 6th month; Fuel Surcharges; Gasoline — 6th month; #2 Heating Oil — 5th month; Laboratory Supplies; Lumber; Metals — 2nd month; Metal Products — 2nd month; Milk; Natural Gas; Paper — 4th month; Paper Products — 3rd month; Petroleum; Petroleum-Based Products — 2nd month; Plastic — 5th month; Plastic Bags — 3rd month; Pork/Pork Products — 2nd month; Poultry — 2nd month; PVC/PVC Pipe and Fittings — 3rd month; Roof Shingles; Stainless Steel Products; Steel — 7th month; Steel Products (large variety) — 3rd month; Steel-Related Products — 2nd month; Transformers; Transportation; Unleaded Gasoline — 5th month.

Commodities Reported Down in Price

Copper Products; Personal Computers.

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, Prices, 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 data presented herein is obtained from a survey of non-manufacturing supply managers based on information they have collected within their respective organizations. ISM makes no representation, other than that stated within this release, regarding the individual company data collection procedures. Use of the data is in the public domain and should be compared to all other economic data sources when used in decision making.

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.

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 June 2004 data will be released at 10:00 a.m. (ET) on July 6, 2004.



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