DECEMBER Big Jump in New Orders Drives Accelerated PMI; Business Activity Increase Fastest Since July 2004

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1 B U S I N E S S DECEMBER HIGH LIGHTS Big Jump in New Orders Drives Accelerated PMI; Business Activity Increase Fastest Since July Route to: Contents See the following pages for complete reports. Manufacturing report report Manufacturing charts charts Manufacturing 51% = Census Bureau Mfg. The New Orders Index is considered to be a leading indicator, and many economists agree that it typically leads output by approximately days. The growth in New Orders in December is an encouraging sign of continued strength in early The New Orders Index has been a major driver of the PMI in and a major reason that the PMI averaged.5 percent for the year. Norbert J. Ore, C.P.M., ISM Manufacturing Business Survey Committee, chair. New Orders Index Supplier Deliveries Index ISM s Supplier Deliveries Index indicates the month-to-month change in non-manufacturing organizations abilities to obtain materials and supplies needed for operating and support requirements in the desired quantity and quality and at the time required. In recent months this index has been relatively high, indicating non-manufacturing organizations have been experiencing difficulty obtaining all of the materials and services they need. Some members attribute this to situations in which the demand for their services and products has been growing faster than the ability of their suppliers to provide the necessary items. Supplier deliveries of materials and services to non-manufacturing organizations have been hampered by low supplier inventories and other capabilities, in addition to rail and truck transportation industry problems. Ralph G. Kauffman, Ph.D., C.P.M., ISM Business Survey Committee, chair. 1

2 DECEMBER MANUFACTURING PMI at 58.6%; New Orders, Production Grow; Employment, Inventories Grow; Supplier Deliveries Slower Economic activity in the manufacturing sector grew in December for the 19th consecutive month, while the overall economy grew for the 38th consecutive month, say the nation s supply executives in the latest Manufacturing ISM Report On Business. December s PMI, driven by a significant increase in the New Orders Index, is very encouraging as growth has accelerated for the second consecutive month. This completes a strong year for manufacturing based on the ISM data, as the overall index averaged above percent for. The last time the PMI averaged over percent for one full calendar year was in 1973, when it averaged 65.9 percent. While there is continuing upward pressure on prices, the rate of increase is slowing and definitely trending in the right direction. Comments from respondents this month focused on inflation, margins and seasonal issues. While many manufacturers are enjoying strong sales, there is concern that inflation is taking its toll on margins, thus reducing profits. While energy and basic commodities are the drivers behind the higher prices, the responses this month show signs of a peak in some commodities. ISM s PMI registered 58.6 percent in December. ISM s New Orders Index rose 5.9 percentage points to 67.4 percent. ISM s Production Index registered 56.9 percent. The ISM Employment Index is at 52.7 percent. ISM s Supplier Deliveries Index registered 54.9 percent. ISM s Inventories Index registered 53.4 percent. ISM s Customers Inventories Index is at 44 percent. ISM s Prices Index in December is 72 percent. ISM s Backlog of Orders Index for December rose 6.5 percentage points to 54 percent. ISM s New Export Orders Index registered percent, and the Imports Index is at 61.1 percent. UP IN PRICE Alloy Steel; Aluminum 14th month; Aluminum Products 3rd month; Butadiene; Caustic Soda 8th month; Chemicals 11th month; Copper 3rd month; Corrugated Containers 11th month; Dairy; Diesel Fuel 4th month; Energy 12th month; Freight 10th month; Fuel* 2nd month; High Density Polyethylene (HDPE) 4th month; Low Density Polyethylene (LDPE) 3rd month; Natural Gas* 29th month; Packaging 7th month; Paper 10th month; PET 3rd month; Plastic Molding Resins; Plastic Products (various forms) 11th month; Plastics 5th month; Polyethylene 4th month; Polypropylene; Propylene 3rd month; Pulp; Resins 5th month; Rubber- Based Products 2nd month; Stainless Steel 4th month; Stainless Steel Products (various forms); Steel* 15th month; Steel Products (various forms) 5th month; and Vinyls. IN SHORT SUPPLY Caustic Soda 4th month; Resins; Stainless Steel 12th month; and Steel 12th month. DOWN IN PRICE Fuel*; Gasoline; Natural Gas* 2nd month; and Steel* 2nd month. *Reported as both up and down in price. December continued a trend of strong growth in the manufacturing sector as closes with significant momentum going into the first quarter of The sector struggles with inflationary pressures, but strong demand is a consolation. Manufacturing inventories have grown in five of the last seven months; however, those respondents increasing their inventories indicate that current and expected demand requires higher inventory levels. The PMI indicates that the manufacturing economy grew in December for the 19th consecutive month. The PMI for December registered 58.6 percent, a 0.8 percentage point increase when compared to the November reading of 57.8 percent. A reading above percent indicates that the manufacturing economy is generally expanding; below Analysis 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. Data for this report was collected in December. AT A GLANCE DECEMBER ISM MANUFACTURING SURVEY DEC. DIRECTION RATE OF CHANGE SERIES INDEX DEC. VS. NOV. DEC. VS. NOV. PMI 58.6 Growing Faster New Orders 67.4 Growing Faster Production 56.9 Growing Slower Employment 52.7 Growing Slower Supplier Deliveries 54.9 Slowing Slower Inventories 53.4 Growing Faster Customers Inventories 44.0 Too Low Slower Prices 72.0 Increasing Slower Backlog of Orders 54.0 Growing From Contracting New Export Orders.0 Growing Faster Imports 61.1 Growing Faster THE ECONOMY Overall Economy Growing Faster Manufacturing Growing Faster PMI % = Manufacturing Economy 42.8% = Overall Economy 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 December 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 December (.5 percent) corresponds to a 6.5 percent increase in real gross domestic product (GDP). In addition, if the PMI for December (58.6 percent) is annualized, this corresponds to a 5.8 percent increase in GDP. 2 Inside Supply Management January 2005

3 DECEMBER NON-MANUFACTURING Business Activity at 63.1%; New Orders, Employment, Order Backlogs, Imports, Prices, Exports Increase Business activity in the non-manufacturing sector increased in December, say the nation s purchasing and supply executives in the latest ISM Report On Business. Business Activity increased for the 21st consecutive month in December. Also in December, New Orders, Employment, Order Backlogs, Imports, Prices and Exports increased. Purchasing and supply executives report that business activity continued to increase in December in the non-manufacturing sector, with the fastest rate of increase since July. The Business Activity Index for December is 63.1 percent, up 1.8 percentage points from November s 61.3 percent. December s index indicates continued growth across most non-manufacturing industries. In December, 13 industry groups reported growth, two indicated contraction, and two reported business unchanged from November. Increased business activity in December was reported by 36 percent of members, reduced activity was reported by 14 percent of members, and the remaining percent of members indicated no change in business activity. The Backlog of Orders Index increased to 56.5 percent, indicating a higher rate of increase than in November. The December New Orders Index increased from 59.9 percent in November to.3 percent in December. This indicates a slightly faster rate of increase of new orders in December compared to November. Members reported UP IN PRICE Airfares 5th month; Aluminum 12th month; Beef; Cheese; Chemicals/Chemical Products 2nd month; Copper/Copper Cable and Wire 16th month; Electrical Connectors and Fittings; Fuel* 13th month; Gasoline* 13th month; Hotel Prices; Lettuce; Metals/Metal Products; Natural Gas 4th month; Office Supplies; Paper/Paper Products 11th month; Personnel; Plastic Bags; Plastic Resin; Plastics 12th month; Polybags 4th month; Pork/ Pork Trimmings; Resins/Resin-Based Products 3rd month; Roofing Shingles 2nd month; Steel 14th month; Steel Products 10th month; Tomatoes* 3rd month; Transportation/Freight Charges 8th month; Welding Supplies; and Wood Products. IN SHORT SUPPLY Construction Labor and Services; Electric Utility Hardware; Ethanol/Ethyl Alcohol; Lumber; Metal/Metal Products; Roofing Products and Materials 2nd month; Steel 11th month; Steel Products 10th month; and Tires. DOWN IN PRICE Chemicals; Computer Hardware 3rd month; Diesel Fuel; Fuel*; Fuel Oil; Gasoline* 2nd month; Pine, Spruce and Treated Lumber 2nd month; Petroleum-Based Products/Petroleum Products; Produce; Soy Oil; Tomatoes*; and Unleaded Gasoline. *Reported as both up and down in price. that the prices they pay increased in December for the 33rd consecutive month, with a slightly faster rate of NON-MANUFACTURING VS. MANUFACTURING Analysis by Ralph G. Kauffman, Ph.D., C.P.M., chair of the Institute for Supply Management Business Survey Committee; and coordinator of the Purchasing and Supply Management Program, University of Houston Downtown. Data for this report was collected in December. increase than in November. December s Prices Index is 71.4 percent, a rise of 0.4 percentage point from the 74 percent reported in November. This month, 38 percent of all respondents and 13 of 17 non-manufacturing industries reported paying higher prices compared to November. Many of members comments regarding business in December indicate continued positive business conditions but with continued concern for inflationary pressures. Specific comments include: Successful year tempered by inflation fears and huge federal debt. Outlook for 2005 is guarded ; Significant increase in shipping costs ; and Gradually improving demand due to improving employment growth. In addition, Inventories increased in December for the second month after being reported unchanged in October. With regard to Inventory Sentiment for December, members reported a higher level of concern than in November that inventories are too high. New Export Orders increased for the 17th consecutive month and Imports increased for the 20th consecutive month. Employment increased for the fifth consecutive month. Supplier Deliveries indicated slower performance for the th consecutive month. Find it at To see the full text and all the charts in the report, visit the ISM Web site at and select the ISM Report On Business link from the menu at the left. Links to regional business survey reports can be found on ISM s Web site at the same location. Manufacturing Dec. Nov. Index Direction Dec. Nov. Index Index Index Change and Rate Index Index Change Survey Question % % From Nov. of Change % % From Nov. Business Activity/ Production Increasing Faster New Orders Increasing Faster Employment Increasing Slower Supplier Deliveries Slowing Faster Inventories Increasing Faster Prices Increasing Faster Backlog of Orders Increasing Faster New Export Orders Increasing Faster Imports Increasing Slower Inventory Sentiment Greater Feeling of Too High N/A N/A N/A Customers Inventories N/A N/A N/A * ISM Report On Business data is seasonally adjusted for the Business Activity, New Orders, Prices and Employment indexes. Manufacturing ISM Report On Business data is seasonally adjusted except for Backlog of Orders, Prices and Customers Inventories. 3

4 MANUFACTURING MANUFACTURING MANUFACTURING MANUFACTURING MANUFACTURING NEW ORDERS CUSTOMERS INVENTORIES 51% = Census Bureau Mfg. December November ISM s New Orders Index grew in December with a reading of 67.4 percent. The index is 5.9 percentage points higher than the 61.5 percent registered in November. Twelve industries reported increases for the month of December: Furniture; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Textiles; Food; Primary Metals; Transportation & Equipment; Printing & Publishing; Chemicals; Electronic Components & Equipment; Paper; and Miscellaneous*. %Too %About %Too Index High Right Low December November The December Customers Inventories Index is at 44 percent, 0.5 percentage point higher compared to 43.5 percent reported in November. Respondents indicate that their customers inventories are too low. This is the 43rd consecutive month that the index has registered below percent. Three industries reported higher customer inventories during December and they are: Textiles; Transportation & Equipment; and Paper. PRODUCTION PRICES 49.9% = Fed. Res. Brd. Ind. Prod. Index December November ISM s Production Index is 56.9 percent in December, 0.1 percentage point lower than the 57 percent reported in November. Of the industries reporting in December, 12 registered growth: Leather; Industrial & Commercial Equipment & Computers; Food; Furniture; Miscellaneous*; Transportation & Equipment; Wood & Wood Products; Chemicals; Primary Metals; Electronic Components & Equipment; and Textiles. 46.9% = B.L.S. Producer Prices Index for Intermediate Materials December November December s Prices Index is at 72 percent, 2 percentage points lower than November s reading of 74 percent. Seventeen industries reported paying higher prices in December: Tobacco; Apparel; Leather; Paper; Instruments & Photographic Equipment; Glass, Stone & Aggregate; Miscellaneous*; Industrial & Commercial Equipment & Computers; Chemicals; Furniture; Transportation & Equipment; Textiles; Wood & Wood Products; Food; Printing & Publishing; and Primary Metals. EMPLOYMENT BACKLOG OF ORDERS 48% = B.L.S. Mfg. Employment December November ISM s Employment Index registered 52.7 percent in December compared to 57.6 percent in November. The eight industries reporting growth in employment during December are: Leather; Apparel; Rubber & Plastic Products; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Food; Miscellaneous*; and Primary Metals. No (data was not collected prior to 1993) Index %Greater %Same %Less December November ISM s Backlog of Orders Index registered 54 percent, indicating manufacturers backlogs in December increased when compared to November. The 10 industries reporting an increase in order backlogs during the month are: Furniture; Primary Metals; Miscellaneous*; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Transportation & Equipment; Food; Printing & Publishing; and Chemicals. SUPPLIER DELIVERIES NEW EXPORT ORDERS Index %Slower %Same %Faster December November ISM s Supplier Deliveries Index for December registered 54.9 percent. A reading above percent indicates slower deliveries. The 11 industries reporting slower supplier deliveries in December are: Apparel; Industrial & Commercial Equipment & Computers; Primary Metals; Food; Glass, Stone & Aggregate; Transportation & Equipment; Furniture; Rubber & Plastic Products; Fabricated Metals; and Chemicals. December November ISM s New Export Orders Index for December registered percent, an increase of 5.3 percentage points. The 12 industries reporting growth in new export orders in December are: Primary Metals; Furniture; Fabricated Metals; Food; Miscellaneous*; Chemicals; Industrial & Commercial Equipment & Computers; Paper; Rubber & Plastic Products; and Transportation & Equipment. INVENTORIES 42.3% = B.E.A. Overall Mfg. Inventories December November ISM s Inventories Index registered 53.4 percent, an increase of 2.7 percentage points when compared to November s.7 percent. The eight industries reporting higher inventories in December are: Leather; Miscellaneous*; Primary Metals; Transportation & Equipment; Food; Wood & Wood Products; Instruments & Photographic Equipment; and Industrial & Commercial Equipment & Computers. *Miscellaneous a preponderance of jewelry, toys, sporting goods and musical instruments. IMPORTS December November Imports of materials by manufacturers grew during December as the Imports Index registered 61.1 percent. The 13 industries reporting growth in import activity for December are: Furniture; Miscellaneous*; Apparel; Glass, Stone & Aggregate; Transportation & Equipment; Food; Industrial & Commercial Equipment & Computers; Fabricated Metals; Printing & Publishing; Wood & Wood Products; Rubber & Plastic Products; and Electronic Components & Equipment. 4 Inside Supply Management January 2005

5 NON-MANUFACTURING NON-MANUFACTURING NON-MANUFACTURING NON-MANUFACTURING BUSINESS ACTIVITY PRICES December November ISM s Business Activity Index in December increased to 63.1 percent. This month, 13 sectors reported increased business activity, two reported decreased activity, and two reported unchanged activity. The industries reporting the highest rates of growth of business activity in December are: Communication; Entertainment; Health Services; Retail Trade; and Business Services. The industries reporting contraction of business activity in December are: Real Estate and Public Administration. December November ISM s Prices Index for December rose to 71.4 percent, up 0.4 percentage point from the 71 percent registered for November. The industries reporting the highest rates of increase in prices paid in December are: Agriculture; Wholesale Trade; Construction; Utilities; and Entertainment. The industries reporting price decreases in December are: Real Estate; Transportation; and Mining. NEW ORDERS BACKLOG OF ORDERS December November ISM s New Orders Index increased to.3 percent. Comments from members include: More client proposal requests and Local economy improving. Industries reporting the highest rates of growth of new orders in December are: Insurance; Finance & Banking; Communication; Health Services; Wholesale Trade; and Utilities. Industries reporting contraction of new orders in December are: Legal Services; Real Estate; Agriculture; and Public Administration. December November ISM s Backlog of Orders Index registered 56.5 percent in December. Comments include: Higher volume on some products due to higher business activity and Manufacturing deliveries have slowed. The industries reporting the highest rates of growth in backlog of orders in December are: Finance & Banking; Entertainment; Construction; Communication; and Retail Trade. The one industry reporting a decline of order backlogs in December is Health Services. EMPLOYMENT NEW EXPORT ORDERS December November ISM s Employment Index for December is 54.9 percent. Comments include: Continued rightsizing and Filling long-open vacancies after expiration of hiring freeze. The industries reporting the highest rates of growth in employment in December are: Entertainment; Finance & Banking; Health Services; Retail Trade; Construction; and Public Administration. The industries reporting reduction in employment in December are: Agriculture; Insurance; Utilities; Business Services; and Other Services*. December November ISM s New Export Orders Index for December is 55.5 percent, indicating a faster rate of growth in December compared to November. The industries reporting increases in new export orders in December are: Entertainment; Finance & Banking; Mining; Wholesale Trade; and Retail Trade. The one industry reporting a decrease in new export orders in December is Public Administration. SUPPLIER DELIVERIES IMPORTS Index %Slower %Same %Faster December November ISM s Supplier Deliveries Index registered 55.5 percent. Comments include: Large number of orders and lack of supply onhand and Supplier shortages in raw materials and production capabilities. The industries reporting the highest rates of slowing in supplier deliveries in December are: Legal Services; Entertainment; Communication; Agriculture; Mining; and Transportation. The one industry reporting faster supplier deliveries in December is Finance & Banking. December November The ISM Imports Index registered 61 percent, 1 percentage point lower than the 62 percent reported in November. December s index marks the 20th consecutive month of import growth. The industries reporting increases in the use of imports in December are: Construction; Entertainment; Wholesale Trade; Retail Trade; and Other Services*. The one industry reporting a decrease in the use of imports in December is Business Services. INVENTORIES December November ISM s Inventories Index registered 56 percent. Comments include: Some projects put on hold until next year, inventory already purchased and Selling off surplus inventory. The industries reporting the highest rates of inventory increases in December are: Agriculture; Transportation; Wholesale Trade; Health Services; and Utilities. The industries reporting inventory decreases in December are: Insurance; Finance & Banking; Other Services*; and Business Services. INVENTORY SENTIMENT *Other Services 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. %Too %About %Too Index High Right Low December November The ISM Inventory Sentiment Index in December registered 64 percent, indicating a somewhat greater discomfort with current high levels of inventory this month than in November. The industries reporting the highest rates of feeling that their inventories are too high in December are: Communication; Insurance; Legal Services; Construction; and Agriculture. No industry is reporting that its inventories are too low in December. 5