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September 2004 Manufacturing ISM Report On Business®

FOR RELEASE: October 1, 2004

Contact: Kristen Kioa
  ISM, Media Relations
  Tempe, Arizona
  (800) 888-6276, Ext. 3015

PMI at 58.5%

DO NOT CONFUSE THIS NATIONAL REPORT with the various regional purchasing reports released across the country. The national 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 September 2004.

New Orders, Production, Employment Grow
Inventories Rise
Supplier Deliveries Slower

(Tempe, Arizona) — Economic activity in the manufacturing sector grew in September for the 16th consecutive month, while the overall economy grew for the 35th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation. "The manufacturing sector continued to grow during September, but at a slightly slower rate. Both new orders and production remain strong, and employment growth accelerated."

The ISM Prices Index still indicates that there is significant upward pressure on prices. ISM's Customers' Inventories Index indicates that customer inventories are too low at this time. The Backlog of Orders Index indicates that order backlogs increased in September. The New Export Orders and Imports Indexes continued to grow in September.

Comments from respondents this month were typical of a growing manufacturing sector. Concerns range from problems with product launches to seasonal issues and strikes. The hurricanes caused problems for some businesses while others saw a pickup in demand. The employment picture is improving according to the respondents as they mention both blue-collar and white-collar new hires. The growth in inventories appears to be voluntary as companies build inventories for "stocking of finished goods for resale," for "hedging against price increases," and, as one member responded simply, "more business, more inventory."

ISM's PMI registered 58.5 percent in September, a decrease of 0.5 percentage point when compared to 59 percent in August. ISM's New Orders Index declined 3.1 percentage points from 61.2 percent in August to 58.1 percent in September. ISM's Production Index increased 2.1 percentage points from 59.5 percent in August to 61.6 percent in September. The ISM Employment Index is at 58.1 percent for September, an increase of 2.4 percentage points when compared to the 55.7 percent reported in August.

ISM's Supplier Deliveries Index registered 59.6 percent, 3.6 percentage points lower than August's 63.2 percent. ISM's Inventories Index registered 51 percent in September, down from the 51.7 percent reported in August. ISM's Customers' Inventories Index for September is at 41.5 percent, a decrease of 4 percentage points compared to the August reading of 45.5 percent. ISM's Prices Index in September is 76 percent, 5.5 percentage points lower than the 81.5 percent reported in August.

ISM's Backlog of Orders Index for September, at 55 percent, was unchanged from the August reading. ISM's New Export Orders Index registered 51.8 percent, a decrease of 2.4 percentage points from August's 54.2 percent. ISM's Imports Index decreased 3.4 percentage points to 55.8 percent in September, down from 59.2 percent in August.

"September was surprisingly strong given the recent slowing of growth in new orders. Production and employment were particularly encouraging as both indexes increased when compared to August. Any concern over inventory growth would seem to be offset by the decline in customer inventories," said Ore.

In September, 15 industries reported growth: Miscellaneous*; Glass, Stone & Aggregate; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Tobacco; Apparel; Transportation & Equipment; Chemicals; Food; Wood & Wood Products; Electronic Components & Equipment; Printing & Publishing; Instruments & Photographic Equipment; Paper; and Fabricated Metals.

"ABS; Alloy; Aluminum; Aluminum Extrusions; Aluminum Products (various forms); Bags; Caustic Soda; Chemicals; Copper Products; Corrugated; Electricity; Energy; Fasteners; Freight; Fuel; Fuel Oil; Gasoline; HDPE; Latex; Lumber; Metals; Natural Gas; Oil; Packaging; Paper; Plastic Products (various forms); Plastic Resins; Plastics; Polyethylene; Polyethylene Resin; Polypropylene; Polypropylene Resin; Propylene Glycol; Resin; Stainless Steel; Stainless Steel Products (various forms); Steel; Steel Products (various forms); and Transportation are the commodities reported up in price. The commodities reported down in price are Corn and Natural Gas (also reported up in price). The commodities listed in short supply are Benzene; Caustic Soda; Chemicals; Stainless Steel; Steel; and Steel Products (various forms)," Ore stated.

SEPTEMBER 2004 ISM BUSINESS SURVEY AT A GLANCE
  Series
Index
Direction
September vs August
Rate of Change
September vs August
PMI 58.5 Growing Slower
New Orders 58.1 Growing Slower
Production 61.6 Growing Faster
Employment 58.1 Growing Faster
Supplier Deliveries 59.6 Slowing Slower
Inventories 51.0 Growing Slower
Customers' Inventories 41.5 Too Low Faster
Prices 76.0 Increasing Slower
Backlog of Orders 55.0 Growing Same
New Export Orders 51.8 Growing Slower
Imports 55.8 Growing Slower

THE ECONOMY AT A GLANCE
Overall Economy Growing Slower
Manufacturing Growing Slower

PMI

The PMI indicates that the manufacturing economy grew in September for the 16th consecutive month. The PMI for September registered 58.5 percent, a 0.5 percentage point decrease when compared to the August reading of 59 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42.8 percent, over a period of time, generally indicates an expansion of the overall economy. The September PMI indicates that both the overall economy and the manufacturing sector are growing. The past relationship between the PMI and the overall economy indicates that the average PMI for January through September (61.5 percent) corresponds to a 6.8 percent increase in real gross domestic product (GDP). In addition, if the PMI for September (58.5 percent) is annualized, this corresponds to a 5.7 percent increase in GDP.

Month Sep'04 Aug'04 Jul'04 Jun'04 May'04
PMI% 58.5 59.0 62.0 61.1 62.8
Month Apr'04 Mar'04 Feb'04 Jan'04 Dec'03
PMI% 62.4 62.5 61.4 63.6 63.4
Month Nov'03 Oct'03 Sep'03 Aug'03 Jul'03
PMI% 61.3 57.1 54.7 55.0 52.6

New Orders

ISM's New Orders Index grew in September with a reading of 58.1 percent. The index is 3.1 percentage points lower than the 61.2 percent registered in August, and it is the 17th consecutive month the index has exceeded 50 percent. A New Orders Index above 51 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 1987 dollars). Eleven industries reported increases for the month of September: Glass, Stone & Aggregate; Rubber & Plastic Products; Miscellaneous*; Industrial & Commercial Equipment & Computers; Apparel; Chemicals; Food; Transportation & Equipment; Wood & Wood Products; Printing & Publishing; and Electronic Components & Equipment.

New Orders %Better %Same %Worse Net Index
September 2004 31 54 15 +16 58.1
August 2004 36 47 17 +19 61.2
July 2004 36 51 13 +23 64.7
June 2004 38 49 13 +25 60.0

Production

ISM's Production Index is 61.6 percent in September, 2.1 percentage points higher than the 59.5 percent reported in August. September is the 17th consecutive month of growth in the index. An index above 49.9 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in September, 15 registered growth: Tobacco; Glass, Stone & Aggregate; Miscellaneous*; Paper; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Chemicals; Transportation & Equipment; Food; Printing & Publishing; Instruments & Photographic Equipment; Furniture; Wood & Wood Products; Rubber & Plastic Products; and Fabricated Metals.

Production %Better %Same %Worse Net Index
September 2004 33 57 10 +23 61.6
August 2004 32 51 17 +15 59.5
July 2004 34 55 11 +23 66.1
June 2004 40 49 11 +29 63.2

Employment

ISM's Employment Index grew for the 11th consecutive month, following a 37-month trend of contraction. The index registered 58.1 percent in September compared to 55.7 percent in August, an increase of 2.4 percentage points. An Employment Index above 48 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The 11 industries reporting growth in employment during September are: Miscellaneous*; Rubber & Plastic Products; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Printing & Publishing; Glass, Stone & Aggregate; Fabricated Metals; Wood & Wood Products; Food; Electronic Components & Equipment; and Instruments & Photographic Equipment.

Employment %Higher %Same %Lower Net Index
September 2004 26 60 14 +12 58.1
August 2004 24 61 15 +9 55.7
July 2004 25 65 10 +15 57.3
June 2004 35 56 9 +26 59.7

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 33rd consecutive month in September. ISM's Supplier Deliveries Index for September registered 59.6 percent, a decrease of 3.6 percentage points compared to August's reading of 63.2 percent. A reading above 50 percent indicates slower deliveries. The 13 industries reporting slower supplier deliveries in September are: Apparel; Miscellaneous*; Wood & Wood Products; Rubber & Plastic Products; Transportation & Equipment; Chemicals; Paper; Instruments & Photographic Equipment; Fabricated Metals; Printing & Publishing; Industrial & Commercial Equipment & Computers; Food; and Electronic Components & Equipment.

Supplier Deliveries %Slower %Same %Faster Net Index
September 2004 23 73 4 +19 59.6
August 2004 31 66 3 +28 63.2
July 2004 35 61 4 +31 64.2
June 2004 39 58 3 +36 68.1

NOTE: A list of commodities in short supply is available at the end of this report.

Inventories

Manufacturers' inventories grew in September for the second consecutive month as ISM's Inventories Index registered 51 percent, a decrease of 0.7 percentage point when compared to August's 51.7 percent. An Inventories Index greater than 42.3 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (in constant 1987 dollars). The 11 industries reporting higher inventories in September are: Instruments & Photographic Equipment; Paper; Glass, Stone & Aggregate; Furniture; Wood & Wood Products; Rubber & Plastic Products; Printing & Publishing; Fabricated Metals; Electronic Components & Equipment; Transportation & Equipment; and Food.

Inventories %Higher %Same %Lower Net Index
September 2004 20 63 17 +3 51.0
August 2004 23 61 16 +7 51.7
July 2004 17 63 20 -3 49.9
June 2004 20 62 18 +2 51.1

Customers' Inventories**

The September Customers' Inventories Index is at 41.5 percent, a decrease of 4 percentage points compared to the August reading of 45.5 percent. Respondents indicate that their customers do not have sufficient inventories on hand at this time. This is the 40th consecutive month that the index has registered below 50 percent. Three industries reported higher customer inventories during September and they are: Instruments & Photographic Equipment; Food; and Primary Metals.

Customers' Inventories %Reporting % Too High % About Right % Too Low Net Index
September 2004 71 8 67 25 -17 41.5
August 2004 73 11 69 20 -9 45.5
July 2004 76 6 63 31 -25 37.5
June 2004 72 8 62 30 -22 39.0

Prices**

ISM's Prices Index indicates manufacturers continued to pay higher prices in September, but at a slower rate. This is the 31st consecutive month the index has registered higher prices. September's index is at 76 percent, 5.5 percentage points lower than August's reading of 81.5 percent. During September, 55 percent of supply executives reported paying higher prices and 3 percent reported paying lower prices, while 42 percent reported that prices were unchanged from the preceding month.

A Prices Index below 46.9 percent, over time, is generally consistent with a decrease in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. Nineteen industries reported paying higher prices in September: Tobacco; Wood & Wood Products; Printing & Publishing; Petroleum; Furniture; Rubber & Plastic Products; Primary Metals; Paper; Textiles; Industrial & Commercial Equipment & Computers; Glass, Stone & Aggregate; Fabricated Metals; Transportation & Equipment; Instruments & Photographic Equipment; Food; Electronic Components & Equipment; Apparel; Chemicals; and Miscellaneous*.

Prices %Higher %Same %Lower Net Index
September 2004 55 42 3 +52 76.0
August 2004 67 29 4 +63 81.5
July 2004 58 38 4 +54 77.0
June 2004 66 30 4 +62 81.0

NOTE: A list of commodities up in price and down in price is available at the end of this report.

Backlog of Orders**

ISM's Backlog of Orders Index registered 55 percent, indicating manufacturers' backlogs in September grew at the same rate when compared to August. Of the 89 percent of respondents who report their backlog of orders, 28 percent reported greater backlogs, 18 percent reported smaller backlogs, and 54 percent reported no change from August. The 11 industries reporting an increase in order backlogs during the month are: Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Miscellaneous*; Wood & Wood Products; Paper; Transportation & Equipment; Chemicals; Fabricated Metals; Instruments & Photographic Equipment; Electronic Components & Equipment; and Furniture.

Backlog of Orders %Reporting %Greater %Same %Less Net Index
September 2004 89 28 54 18 +10 55.0
August 2004 89 29 52 19 +10 55.0
July 2004 87 32 52 16 +16 58.0
June 2004 88 31 55 14 +17 58.5

New Export Orders

ISM's New Export Orders Index for September registered 51.8 percent, a decrease of 2.4 percentage points when compared to August's index of 54.2 percent. This is the 22nd consecutive month of growth in export orders. The eight industries reporting growth in new export orders in September are: Primary Metals; Miscellaneous*; Chemicals; Textiles; Industrial & Commercial Equipment & Computers; Food; Fabricated Metals; and Paper.

New Export Orders %Reporting %Better %Same %Worse Net Index
September 2004 78 12 81 7 +5 51.8
August 2004 76 19 72 9 +10 54.2
July 2004 77 19 75 6 +13 56.2
June 2004 77 24 70 6 +18 56.7

Imports

Imports of materials by manufacturers grew during September as the Imports Index registered 55.8 percent. The index declined 3.4 percentage points when compared to August's index of 59.2 percent, indicating a slower rate of growth. The 12 industries reporting growth in import activity for September are: Furniture; Printing & Publishing; Glass, Stone & Aggregate; Wood & Wood Products; Transportation & Equipment; Fabricated Metals; Instruments & Photographic Equipment; Primary Metals; Industrial & Commercial Equipment & Computers; Miscellaneous*; Food; and Chemicals.

Imports %Reporting %Higher %Same %Lower Net Index
September 2004 79 23 72 5 +18 55.8
August 2004 78 23 71 6 +17 59.2
July 2004 79 23 72 5 +18 59.9
June 2004 78 22 74 4 +18 57.6

*Miscellaneous is a preponderance of jewelry, toys, sporting goods and musical instruments.

**The Backlog of Orders, Prices and Customers' Inventories Indexes do not meet the accepted criteria for seasonal adjustments.

Buying Policy

Average commitment leadtime for Capital Expenditures rose 14 days to 110 days. Average leadtime for Production Materials increased 1 day to 47 days. Average leadtime for Maintenance, Repair, and Operating (MRO) supplies decreased 3 days to 20 days.

  Percent Reporting
  Hand
to
Mouth
30
Days
60
Days
90
Days
6
Mos.
1
Year+
Avg.
Days
Capital Expenditures              
September 2004 23 8 15 18 27 9 110
August 2004 26 11 13 21 22 7 96
July 2004 24 8 14 21 25 8 105
June 2004 23 9 16 20 23 9 105
Production Materials              
September 2004 24 39 22 11 2 2 47
August 2004 24 39 22 10 4 1 46
July 2004 20 45 21 10 3 1 45
June 2004 25 40 20 11 3 1 44
MRO Supplies              
September 2004 58 31 10 0 1 0 20
August 2004 52 36 8 3 1 0 23
July 2004 53 36 8 2 1 0 22
June 2004 51 38 9 1 1 0 22

In Short Supply

Benzene; Caustic Soda; Chemicals — 2nd month; Stainless Steel — 9th month; Steel — 9th month; and Steel Products (various forms) — 3rd month.

Up in Price

ABS; Alloy — 2nd month; Aluminum — 11th month; Aluminum Extrusions — 2nd month; Aluminum Products (various forms); Bags; Caustic Soda — 5th month; Chemicals — 8th month; Copper Products — 2nd month; Corrugated — 8th month; Electricity; Energy — 9th month; Fasteners; Freight — 7th month; Fuel; Fuel Oil — 9th month; Gasoline — 9th month; HDPE; Latex — 2nd month; Lumber — 5th month; Metals; Natural Gas* — 26th month; Oil; Packaging — 4th month; Paper — 7th month; Plastic Products (various forms) — 8th month; Plastic Resins — 2nd month; Plastics — 2nd month; Polyethylene; Polyethylene Resin; Polypropylene — 2nd month; Polypropylene Resin; Propylene Glycol; Resin — 2nd month; Stainless Steel; Stainless Steel Products (various forms) — 3rd month; Steel — 12th month; Steel Products (various forms) — 2nd month; and Transportation.

Down in Price

Corn — 2nd month; and Natural Gas* — 3rd month.

*Reported as both up and down in price.

The data presented herein is obtained from a survey of 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.

Data and Method of Presentation

The Manufacturing ISM Report On Business® is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. Membership of the Business Survey Committee is diversified by Standard Industrial Classification (SIC) category, based on each industry's contribution to Gross Domestic Product (GDP). Twenty industries from various U.S. geographical areas are represented on the committee. The 20 manufacturing Standard Industry Classification codes are: Food; Tobacco; Textiles; Apparel; Wood & Wood Products; Furniture; Paper; Printing & Publishing; Chemicals; Petroleum; Rubber & Plastic Products; Leather; Glass, Stone & Aggregate; Primary Metals; Fabricated Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Instruments & Photographic Equipment; and Miscellaneous (a preponderance of jewelry, toys, sporting goods, musical instruments).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers' Inventories, Employment, and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher, better, and slower for Supplier Deliveries) and the negative economic direction (lower, worse, and faster for Supplier Deliveries), and the diffusion index. Responses are raw data and are never changed. The diffusion index includes the percent of positive responses plus one-half of those responding the same (considered positive).

The resulting single index number is then seasonally adjusted to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-moveable holidays. All seasonal adjustment factors are supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them. The PMI is a composite index based on the seasonally adjusted diffusion indices for five of the indicators with varying weights: New Orders — 30%; Production — 25%; Employment — 20%; Supplier Deliveries — 15%; and Inventories — 10%.

Diffusion indices have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent that it is generally declining. A PMI over 42.8 percent, over a period of time, indicates that the overall economy, or Gross Domestic Product (GDP), is generally expanding; below 42.8 percent, it is generally declining. The distance from 50 percent or 42.8 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, ISM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

Responses to Buying Policy reflect the percent reporting the current month's leadtime, the approximate weighted number of days ahead for which commitments are made for Production Materials, Capital Expenditures, and Maintenance, Repair, and Operating (MRO) Supplies, expressed as hand-to-mouth (five days), 30 days, 60 days, 90 days, six months (180 days), a year or more (360 days), and the weighted average number of days. These responses are raw data, never revised, and not seasonally adjusted since there is no significant seasonal pattern.

The data presented herein is obtained from a survey of 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 Manufacturing ISM Report On Business® is published monthly by the Institute for Supply Management™. 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 report has been issued by the association since 1931, except for a four-year interruption during World War II.

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

The next Manufacturing ISM Report On Business® featuring the October 2004 data will be released at 10:00 a.m. (ET) on November 1, 2004.



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