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July 2002 Non-Manufacturing ISM Report On Business®

FOR RELEASE: August 5, 2002

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  800/888-6276, Ext. 3015
Business Activity at 53.1%

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 July 2002.

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

(Tempe, Arizona) — Business activity in the non-manufacturing sector increased in July 2002, 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. "In July, non-manufacturing business activity increased at a slower rate than in June. The reported growth represents the sixth consecutive month of expansion in non-manufacturing business activity, but the second consecutive month of reduced rates of expansion," Kauffman said. He added, "Also in July, New Orders grew at a slower rate than in June, and the Backlog of Orders Index indicated smaller backlogs than in June."

Reports from purchasing and supply executives indicate nine industry groups grew in July, six groups contracted, and two groups indicated no change. Increased business activity in July was reported by 25 percent of members, compared to June's 35 percent. Reduced activity was reported by 21 percent of members compared to 15 percent in June. In July, the remaining 54 percent of members indicated no change in business activity compared to 50 percent in June. The overall sense of how members currently assess the business climate is reflected in one member's comment, "While the economy continues to show signs of improvement, overall outlook remains cautious through year-end." Other comments cited negative effects of national economic bad news, but some members indicated that business was either holding its own or increasing. July's Business Activity Index of 53.1 confirms that more members are reporting growth than contraction, but the drop in the Index from 57.2 percent in June means that July's rate of growth was less substantial.

Also this month, Inventories increased after two months of decreases, and Prices increased for the fifth month. New Export Orders and Imports continued to increase in July, while Employment shrank for the 17th consecutive month. The Inventory Sentiment Index did not change, indicating the same level of discomfort with current inventory levels as in June. Supplier Deliveries indicated slower performance for the 11th consecutive month.

Significant reports of commodities in short supply or up or down in price in July indicate none are in short supply. Price increases are reported for beef; carbon flat roll (steel); carbon steel pipe and associated fittings; copper; copper fittings; corrugated; energy; flat rolled products (steel); food; freight; fuel; gas; insurance; lemons; oils; paper; paper (cut stock); petroleum; polyethylene; pork; romaine lettuce; soy oil; stainless steel products (fittings, pipe, tube); and steel. Price decreases are reported for cheese; dairy; diesel fuel (#2); gas/fuel; gasoline; heating oil (#2); natural gas; PCs; and produce.

ISM NON-MANUFACTURING SURVEY RESULTS AT A GLANCE and
COMPARISON OF ISM NON-MANUFACTURING AND ISM MANUFACTURING SURVEYS*
  Non-Manufacturing Manufacturing
Index July
Index %
June
Index %
Index Change
from June
Direction &
Rate of Change
July
Index %
June
Index %
Index Change
from June
Business Activity / Production 53.1 57.2 -4.1 Increasing Slower 55.7 61.4 -5.7
New Orders 52.6 56.9 -4.3 Increasing slower 50.4 60.8 -10.4
Employment 45.8 44.3 +1.5 Decreasing Slower 45.0 49.7 -4.7
Supplier Deliveries 52.5 53.5 -1.0 Slowing slower 54.9 55.2 -0.3
Inventories 52.0 47.5 +4.5 Increasing from decreasing 41.8 43.7 -1.9
Prices 59.0 54.0 +5.0 Increasing faster 68.3 65.5 +2.8
Backlog of Orders 43.5 49.0 -5.5 Decreasing faster 45.5 53.5 -8.0
New Export Orders 59.5 57.5 +2.0 Increasing faster 52.2 54.5 -2.3
Imports 52.6 55.2 -2.6 Increasing slower 54.2 55.1 -0.9
Inventory Sentiment 66.0 66.0 0.0 Same feeling of "too high" N/A    
Customers' Inventories N/A       42.5 44.5 -2.0

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

Business Activity

ISM's Non-Manufacturing Business Activity Index in July declined 4.1 percentage points on a seasonally adjusted basis to 53.1 percent from June's 57.2 percent. July's Index indicates a slowing in the rate of growth for the second consecutive month and was the lowest since January 2002 (49.6 percent). In July, nine sectors reported increased business activity, six sectors reported decreased activity, and two were unchanged, compared to June. The percent of members reporting increased activity in July was 25 percent, a drop of 10 percentage points from June's 35 percent. Decreased activity was reported by 21 percent of members in July, compared to 15 percent in June. Those reporting no change in activity in July totaled 54 percent, compared to 50 percent in June.

The industries reporting the highest rates of growth of business activity in July are: Real Estate; Entertainment; Utilities; Agriculture; Transportation; and Construction. The industries reporting the highest rates of contraction of business activity in July are: Communication; Mining; Business Services; Wholesale Trade; and Other Services*.

Business
Activity
% Higher % Same % Lower Index
July 2002 25 54 21 53.1
June 2002 35 50 15 57.2
May 2002 34 55 11 60.1
April 2002 31 56 13 55.3

New Orders

ISM's Non-Manufacturing New Orders Index decreased to 52.6 percent in July from 56.9 percent in June. July's New Orders Index is the lowest since January 2002 (49.4 percent). Comments from members include: "Not spending capital dollars"; "Increased sales activity at stores"; "Soft coal market"; and "Increased buying activity for new jobs."

The industries reporting growth of new orders in July are: Real Estate; Entertainment; Public Administration; Construction; and Retail Trade. The industries reporting the highest rates of contraction of new orders in July are: Mining; Insurance; Other Services*; Business Services; Communication; and Finance and Banking.

New Orders % Higher % Same % Lower Index
July 2002 21 58 21 52.6
June 2002 36 49 15 56.9
May 2002 32 55 13 56.8
April 2002 33 55 12 56.4

Employment

Employment in the non-manufacturing sector contracted in July for the 17th consecutive month. ISM's Non-Manufacturing Employment Index for July is 45.8 percent compared to 44.3 percent in June. July's Index indicates a slower rate of decrease. Comments from respondents include: "We are advertising in newspapers to increase our employment by 10%"; "Retirements and layoffs"; and "Hiring freeze on most positions."

The industries reporting the highest rates of growth in employment in July are: Utilities; Transportation; Retail Trade; Health Services; and Public Administration. Industries reporting the highest rates of reduction in employment in July are: Communication; Mining; Entertainment; Agriculture; and Finance and Banking.

Employment % Higher % Same % Lower Index
July 2002 13 71 16 45.8
June 2002 13 66 21 44.3
May 2002 15 70 15 49.5
April 2002 12 75 13 48.9

Supplier Deliveries

The delivery performance of suppliers to non-manufacturing organizations was slower for the 11th consecutive month in July, registering an index value of 52.5 percent, one percentage point lower than June's 53.5 percent. A reading above 50 percent indicates slower deliveries. Comments from purchasing and supply executives concerning supplier deliveries in July include: "Still slower than historical levels because our suppliers are busy"; "Reduced inventory levels"; "Production capacities"; and "Credit issues."

The industries that reported the highest rates of slowing in supplier deliveries in July are: Entertainment; Transportation; Wholesale Trade; Other Services*; and Utilities. Industries reporting faster supplier deliveries in July are: Mining; Public Administration; and Health Services.

Supplier
Deliveries
% Slower % Same % Faster Index
July 2002 9 87 4 52.5
June 2002 10 87 3 53.5
May 2002 6 92 2 52.0
April 2002 6 91 3 51.5

Inventories

ISM's Non-Manufacturing Inventories Index registered 52 percent in July, an increase of 4.5 percentage points from the 47.5 percent reported in June. July's Index means that material inventories maintained by non-manufacturing organizations increased in July after two months of reported decreases. Of the total respondents in July, 30 percent indicate they do not have or do not measure inventories. Comments from members include: "End of fiscal year purchases"; "Business slow down"; "Building inventory to support growth"; "Addition of new supplier"; and "Excess job-related material being returned."

The industries reporting inventory increases in July are: Legal Services; Wholesale Trade; Other Services*; and Utilities. Industries reporting inventory decreases in July are: Insurance; Business Services; Agriculture; and Construction.

Inventory
Change
% Higher % Same % Lower Index
July 2002 23 58 19 52.0
June 2002 19 57 24 47.5
May 2002 19 59 22 48.5
April 2002 21 63 16 52.5

Prices

Prices paid by non-manufacturing organizations for purchased materials and services increased for the fifth month in July after eight months of lower or unchanged prices prior to March 2002. ISM's Non-Manufacturing Prices Index for July is 59 percent, an increase of 5 percentage points from June's 54 percent. In July, the percentage of members reporting higher prices rose to 26 percent from 18 percent in June, the proportion indicating no change dropped 6 percentage points to 66 percent, and the number who noted lower prices declined 2 percentage points to 8 percent.

The industries reporting the highest rates of increase in prices paid in July are: Wholesale Trade; Transportation; Construction; Agriculture; and Communication. The only industry that reported decreasing prices in July is Real Estate.

Prices % Higher % Same % Lower Index
July 2002 26 66 8 59.0
June 2002 18 72 10 54.0
May 2002 20 71 9 55.5
April 2002 26 67 7 59.5

Backlog of Orders

ISM's Non-Manufacturing Backlog of Orders Index registered 43.5 percent in July. This is the second consecutive indication of contraction in order backlogs. These two months of decrease follow May's backlog increase, the first growth indicated by this Index in 17 months. The July Index is a decrease of 5.5 percentage points from June's 49 percent and is the lowest Backlog Index since November 2001 (42 percent). Purchasing and supply executives' comments on backlogs of orders include: "Worked off backlog"; "Getting caught up"; "We have caught up to backlog due to lower overall activity"; and "Soft coal market." Of the total respondents in July, 44 percent indicated they do not measure backlog of orders.

The only industry reporting growth of backlog of orders in July was Real Estate. The industries reporting the highest rates of decline of order backlogs in July are: Health Services; Mining; Wholesale Trade; Retail Trade; and Communication.

Backlog
of Orders
% Higher % Same % Lower Index
July 2002 12 63 25 43.5
June 2002 13 72 15 49.0
May 2002 15 77 8 53.5
April 2002 10 77 13 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 for the fourth month in July after a slight dip in March. The New Export Orders Index for July is 59.5 percent compared to June's 57.5 percent. Of the total respondents in July, 76 percent indicated they either do not perform, or do not separately measure, orders for work outside the United States.

The industries reporting the highest rates of increase in new export orders in July are: Agriculture; Wholesale Trade; Communication; Mining; and Other Services*. No industry reported a decrease in new export orders in July.

New Export
Orders
% Higher % Same % Lower Index
July 2002 24 71 5 59.5
June 2002 24 67 9 57.5
May 2002 30 63 7 61.5
April 2002 10 85 5 52.5

Imports

In July, use of imported materials by non-manufacturing industries increased for the fourth month after a decrease in March. ISM's Non-Manufacturing Imports Index for July is 52.6 percent, a decrease of 2.6 percentage points from the 55.2 percent reported in June. In July, 70 percent of respondents reported that they do not use or do not track use of imported materials.

The industries reporting an increase in use of imports in July are: Transportation; Agriculture; Communication; Wholesale Trade; and Retail Trade. The industries reporting decreased use of imports in July are Business Services and Other Services*.

Imports % Higher % Same % Lower Index
July 2002 13 82 5 52.6
June 2002 19 72 9 55.2
May 2002 18 75 7 54.0
April 2002 16 82 2 56.2

Inventory Sentiment

The ISM Non-Manufacturing Inventory Sentiment Index in July registered 66 percent, the same as in June. This indicates that non-manufacturing purchasing and supply executives felt the same degree of discomfort with current levels of inventory in July as they did during June. In both July and June, 35 percent of respondents felt their inventories were too high, 3 percent indicated their inventories were too low, and 62 percent said that their inventories were about right.

The industries that reported the highest rates of feeling that their inventories were too high in July are: Legal Services; Mining; Insurance; Wholesale Trade; Finance and Banking; Health Services; Transportation; Agriculture; and Retail Trade. No industry reported that its inventories were too low in July.

Inventory
Sentiment
% Too High % About Right % Too Low Index
July 2002 35 62 3 66.0
June 2002 35 62 3 66.0
May 2002 32 66 2 65.0
April 2002 33 60 7 63.0

*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

No commodities reported in short supply.

Commodities Reported Up in Price

Beef — 3rd month; Carbon Flat Roll (steel); Carbon Steel Pipe and Associated Fittings; Copper — 5th month; Copper Fittings; Corrugated; Energy; Flat Rolled Products (steel); Food; Freight; Fuel — 5th month; Gas; Insurance; Lemons; Oils; Paper — 3rd month; Paper (cut stock); Petroleum; Polyethylene; Pork; Romaine Lettuce; Soy Oil; Stainless Steel Products (fittings, pipe, tube); Steel — 6th month.

Commodities Reported Down in Price

Cheese — 2nd month; Dairy; Diesel Fuel (#2) — 2nd month (some reports of price increases); Gas/Fuel; Gasoline — 2nd month; Heating Oil (#2); Natural Gas; PCs — 3rd month; Produce.

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.

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 August 2002 data will be released at 10:00 a.m. (ET) on September 5, 2002.



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