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Economic Recovery Continues in 2010: Institute for Supply Management

December 8, 2009
TEMPE, AZ—December 08, 2009—Economic growth in the United States will resume in 2010, say the nation’s purchasing and supply management executives in their December 2009 Semiannual Economic Forecast. Expectations for 2010 are for the positive conditions experienced in the second half of 2009 to continue in manufacturing, while the non-manufacturing sector foresees marginal growth, say the nation’s purchasing and supply management executives in their December 2009 Semiannual Economic Forecast.

The overall forecast projects optimism about the U.S. economy for 2010. The manufacturing sector overall is positive about prospects in 2010 with revenues expected to increase in 13 of 18 industries, while the non-manufacturing sector appears slightly less positive about the year ahead with 8 of 18 industries expecting higher revenues. Business investment, a major driver in the U.S. economy, will decline as both sectors expect a combined average of a 5.4 percent decline in capital spending.

These projections are part of the forecast issued by the Business Survey Committee of the Institute for Supply Management (ISM). The forecast was released today by Norbert J. Ore, CPSM, C.P.M., chair of the ISM Manufacturing Business Survey Committee; and by Anthony S. Nieves, C.P.M., CFPM, chair of the ISM Non-Manufacturing Business Survey Committee, and senior vice president — supply management, Hilton Worldwide.

Manufacturing Summary

Expectations for 2010 are positive as 60 percent of survey respondents expect revenues to be greater in 2010 than in 2009. The panel of purchasing and supply executives expects a 5.7 percent net increase in overall revenues for 2010, compared to a 10.7 percent decrease reported for 2009. The 13 manufacturing industries expecting improvement over 2009 — listed in order — are: Transportation Equipment; Nonmetallic Mineral Products; Printing & Related Support Activities; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Chemical Products; Machinery; Miscellaneous Manufacturing(a); Textile Mills; and Fabricated Metal Products.

"Manufacturing purchasing and supply executives reflect more of their typical optimism about their organizations' prospects as they consider the first half of 2010,and they are even more positive about the second half," said Ore. "While 2009 has been a challenging year overall, we are in a growth trend as we approach the end of the year. Respondents expect cost pressures to be low to moderate based on their price forecast. Manufacturing growth is now in its fourth consecutive month as measured by and reported in the monthly Manufacturing ISM Report On Business®."

In the manufacturing sector, respondents report operating at 70.1 percent of their normal capacity, up from 67 percent reported in April 2009. Purchasing and supply executives predict that capital expenditures will decrease by 4 percent in 2010, compared to a 7.8 percent decrease reported for 2009. Survey respondents also forecast that they will reduce inventories in an effort to improve their purchased inventory-to-sales ratio in 2010. Manufacturers have an expectation that employment in the sector will increase by 1.5 percent, while labor and benefits costs are expected to increase an average of 1.4 percent in 2010. Manufacturing purchasers are predicting strength in exports and imports in 2010. They also expect the U.S. dollar to weaken on average against the currencies of major trading partners.

The panel also predicts the prices they pay will increase 0.2 percent during the first four months of 2010, and will increase an additional 2.4 percent during the balance of 2010, with an overall increase of 2.6 percent for 2010. Respondents' major concerns are: weak economy; credit crisis; taxes; interest rates; and high energy costs. Survey respondents expect to realize supply chain improvements through supplier consolidation; new or improved enterprise technology and system utilization; improved inventory/asset management; lean manufacturing; and cost reduction.

Non-Manufacturing Summary

Forty percent of non-manufacturing supply management executives expect their 2010 revenues to be greater than in 2009. They currently expect a 1.3 percent net increase in overall revenues for 2010 compared to a 4.5 percent decrease reported for 2009. The eight non-manufacturing industries expecting revenue improvement in 2010 over 2009 — listed in order — are: Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Finance & Insurance; Wholesale Trade; Retail Trade; Other Services(b); Information; and Agriculture, Forestry, Fishing & Hunting.

"Non-manufacturing supply managers report operating at 81.3 percent of their normal capacity, above the 80.1 percent reported in April 2009. They are cautiously optimistic about continued growth in the first half of 2010 compared to the second half of 2009, and they have a lower level of optimism about the next 12 months than they had last December for 2009," said Nieves. "They forecast that their capacity to produce products and provide services will rise by 0.9 percent during 2010, and capital expenditures will decrease by 6.7 percent from the 2009 level. Non-manufacturers also predict that their employment will decrease by 0.6 percent during 2010. Their major economic concerns are: weak economy; healthcare and benefits costs; credit crisis; labor costs; and high energy costs.”

Respondents in non-manufacturing industries expect that the prices they pay for materials and services will increase by 1.1 percent during 2010. They also forecast their overall labor and benefit costs will remain unchanged for 2010. Profit margins are reported to have decreased in the second and third quarters of 2009, and respondents expect them to increase between now and April 2010. Survey respondents indicate the increased use of strategic sourcing is the most frequently cited means of improving supply chains in 2010. Other improvement approaches include: product rationalization/demand management; supplier consolidation; improved inventory/asset management; and spend analysis/consolidation.

OPERATING RATE

Manufacturing
Manufacturing purchasing and supply executives report that their companies are currently operating at 70.1 percent of normal capacity. This is an increase when compared to April 2009 (67 percent) and less than the rate reported in December 2008 (75.2 percent). The November data from the monthly Manufacturing ISM Report On Business® indicates the manufacturing sector is in its fourth month of growth. The following 11 industries — listed in order — are operating above the average capacity of 70.1 percent: Paper Products; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing(a); Chemical Products; Petroleum & Coal Products; Wood Products; Textile Mills; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; and Computer & Electronic Products.

Non-Manufacturing
Non-manufacturing supply executives report that their organizations are currently operating at 81.3 percent of normal capacity. This is higher than the 80.1 percent reported in April 2009, and lower than the 83.1 percent reported in December 2008. Considering production capacity increases reported in the following section of this forecast, this indicates that non-manufacturing industries are continuing to add capacity, but also find it necessary to maintain their utilization of capacity at a relatively high level. The following 10 industries — listed in order — are operating at or above the average capacity level of 81.3 percent: Information; Other Services(b); Educational Services; Public Administration; Real Estate, Rental & Leasing; Utilities; Health Care & Social Assistance; Transportation & Warehousing; Professional, Scientific & Technical Services; and Finance & Insurance.

PRODUCTION CAPACITY

Manufacturing
Production capacity in manufacturing decreased 5 percent in 2009 as 26 percent of purchasing and supply executives reported an average capacity increase of 15 percent, 34 percent reported decreases averaging 25.8 percent, and 40 percent reported no change. This compares to a predicted decrease of 8.4 percent for 2009 made in April 2009. Expectations for 2010 are for an increase of 2.7 percent. The following six industries — listed in order — report achieving an increase in production capacity in 2009: Nonmetallic Mineral Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Furniture & Related Products; Miscellaneous Manufacturing(a); and Computer & Electronic Products.

The principal means of achieving increases in production capacity in 2009 were (in order of importance):

1. More hours worked with existing personnel

2. Additional plant and/or equipment

3. Additional personnel (permanent, temporary or contract)

4. Replaced equipment with technically advanced equipment

5. More shifts worked with existing personnel

Non-Manufacturing
The capacity to produce products or provide services in the non-manufacturing sector decreased 1.4 percent during 2009. This compares to the 0.3 percent increase reported in December 2008 for the year 2008, and is less than the prediction in April 2009 of a 2.6 percent decrease for 2009. For 2010, an increase (0.9 percent) is predicted. For 2009, 15 percent of non-manufacturing supply managers indicate increases averaging 9.6 percent, and 16 percent of respondents indicate decreases averaging 17.9 percent. Sixty-nine percent see no change in their capacity. The five industries reporting increases in capacity in 2009 are: Retail Trade; Accommodation & Food Services; Other Services(b); Professional, Scientific & Technical Services; and Utilities.

The principal means of achieving increases in production capacity in 2009 were (in order of importance):

1. More hours worked with existing personnel

2. Replaced equipment with technically advanced equipment

3. Additional personnel (permanent, temporary or contract)

4. Additional plant and/or equipment

5. More shifts worked with existing personnel

CAPITAL EXPENDITURES — 2009 vs. 2008

Manufacturing
Purchasing and supply managers report 2009 capital expenditures declined 7.8 percent when compared to 2008 levels. The actual expenditures for 2009 exceed survey respondents’ previous expectations, as they predicted a decrease of 22.7 percent for 2009 in April 2009. The 14 percent of purchasers who reported increased capital expenditures in 2009 indicated an average increase of 102.8 percent, while the 55 percent who said their capital spending was reduced reported an average decrease of 40.9 percent. Thirty-one percent said they spent the same in 2009 as in 2008. The four industries showing increases in capital expenditures for 2009 are: Printing & Related Support Activities; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing(a); and Machinery.

Non-Manufacturing
Non-manufacturing supply management executives report their level of capital expenditures in 2009 compared to 2008 declined 4.2 percent. This compares to the 1.4 percent increase reported for 2008 one year ago, and is significantly less than the 13.5 percent decrease pedicted by respondents in April 2009. Fifteen percent of respondents report increases averaging 60 percent. An additional 52 percent report decreases averaging 24.9 percent. Thirty-three percent indicate they spent the same on capital expenditures in 2009 as in 2008. The three industries experiencing increases in capital expenditures in 2009 are: Retail Trade; Mining; and Professional, Scientific & Technical Services.

PREDICTED CAPITAL EXPENDITURES — 2010 vs. 2009

Manufacturing
Purchasing and supply executives expect capital expenditures to decrease 4 percent in 2010. The 43 percent of respondents who predict increased capital expenditures in 2010 indicate an average increase of 32.5 percent, while the 24 percent who said their capital spending would be reduced predict an average decrease of 74.1 percent; 33 percent said they expect to spend the same in 2010 as in 2009. The 10 industries predicting increases in capital expenditures for 2010 — in order of percentage increase — are: Paper Products; Transportation Equipment; Wood Products; Plastics & Rubber Products; Textile Mills; Electrical Equipment, Appliances & Components; Machinery; Apparel, Leather & Allied Products; Miscellaneous Manufacturing(a); and Fabricated Metal Products.

Non-Manufacturing
Non-manufacturing purchasing and supply executives are expecting a decrease of 6.7 percent in capital expenditures from what they are reporting for 2009 (a decrease of 4.2 percent). The 31 percent of respondents expecting to spend more predict an average increase of 13.7 percent. An additional 28 percent anticipate a decrease averaging 39.7 percent. Forty-one percent expect to spend the same on capital expenditures in 2010 as in 2009. The six industries expecting increases in capital expenditures in 2010 — in order of percentage increase — are: Professional, Scientific & Technical Services; Mining; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Public Administration; and Finance & Insurance.

PRICES — Changes Between End of 2008 and End of 2009

Manufacturing
After an initial forecast in April 2009 of a 5.3 percent decrease in prices paid, survey respondents now report realized price decreases averaging 4.6 percent for the year. The 13 percent who say their prices are higher now than at the end of 2008 report an average increase of 11.7 percent, while the 63 percent who report lower prices averaged a 9.7 percent decrease. The remaining 24 percent indicate no change between the end of 2008 and the end of 2009. The three industries reporting price increases — in order of percentage increase — are: Plastics & Rubber Products; Petroleum & Coal Products; and Machinery.

Non-Manufacturing
As 2009 draws to a close, non-manufacturing supply managers report prices they pay have decreased by 2.2 percent over the entire year. This is less than the “no price change” they predicted in April 2009, and less than the 2.3 percent increase reported one year ago for 2008. Thirty-five percent of purchasers report price increases averaging 5.5 percent. Forty percent of purchasers indicate decreased prices with an average reduction of 10.1 percent, and 25 percent of respondents have not experienced overall price changes this year. The three industries reporting price increases in 2009 are: Health Care & Social Assistance; Accommodation & Food Services; and Educational Services.
Non-Manufacturing Price Changes Between End of 2008 and End of 2009
                 

PRICES – Predicted Changes Between End of 2009 and April 2010

Manufacturing
Thirty-eight percent of purchasing and supply managers expect the prices they pay to increase in early 2009 by an average of 5.5 percent. At the same time, 18 percent anticipate decreases averaging 10.5 percent. Including the 44 percent who expect no change in prices in the first four months of 2010, purchasers expect the net average overall price change to increase 0.2 percent for the first four months of 2010. The 10 industries predicting increases in prices paid for the first part of 2009 — in order of percentage increase — are: Transportation Equipment; Computer & Electronic Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Miscellaneous Manufacturing(a); Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; Chemical Products; and Machinery.

Non-Manufacturing
Non-manufacturing survey respondents predict that their purchases in the first four months of 2010 will cost an average of 1.2 percent more than at the end of 2009. This is more than the decrease reported in the preceding section for all of 2009. Considering the prediction of price change for all of 2010 (1.1 percent), purchasing and supply executives apparently expect most of next year’s price increase to occur in the first part of the year. Forty-seven percent of non-manufacturing respondents predict the prices they pay will increase an average of 4.4 percent in the first part of 2010. Thirteen percent of respondents expect price decreases averaging 6.6 percent. The remaining 40 percent predict no change in prices in the first four months of 2010. The seven industries predicting greater than the 1.2 percent average increase in prices they expect to pay in the first part of 2010 — in order of percentage increase — are: Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; Health Care & Social Assistance; Information; Mining; Management of Companies & Support Services; and Public Administration.

PRICES — Predicted Changes Between End of 2009 and End of 2010

Manufacturing
Respondents predict a net average increase in prices paid of 2.6 percent between December 2009 and December 2010, indicating they expect prices to increase an additional 2.4 percent during the period of April 2010 through December 2010. Sixty-five percent of respondents expect an average price increase of 5.5 percent, while 14 percent expect an average decline of 7.6 percent. The remaining 21 percent expect no change in their average prices paid for the year. The 11 industries expecting to receive above-average increases by the end of 2010 — in order of percentage increase — are: Transportation Equipment; Petroleum & Coal Products; Wood Products; Nonmetallic Mineral Products; Paper Products; Plastics & Rubber Products; Textile Mills; Food, Beverage & Tobacco Products; Fabricated Metal Products; Furniture & Related Products; and Miscellaneous Manufacturing(a).

Non-Manufacturing
For all of 2010, non-manufacturing supply management executives expect their prices to increase an average of 1.1 percent. Fifty-two percent of respondents expect increases averaging 5.1 percent, 18 percent anticipate prices to drop an average of 8.9 percent, and 30 percent foresee no change in prices during the next year. The 10 industries expecting greater than the 1.1 percent average price increase by the end of 2010 — in order of percentage increase — are: Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; Mining; Management of Companies & Support Services; Public Administration; Retail Trade; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; and Educational Services.

LABOR AND BENEFIT COSTS — Predicted Rate Change End of 2009 vs. End of 2010

Manufacturing
Purchasing and supply executives expect higher overall labor and benefit costs for 2010. Forty-eight percent of respondents expect increased labor and benefit costs and expect them to grow by an average of 3.9 percent for all of 2010, while the 5 percent forecasting lower costs see them decreasing by an average of 10.6 percent. Including the 47 percent of respondents who believe costs will remain the same, the expected overall net rate of increase is 1.4 percent between the end of 2009 and the end of 2010. The 14 industries expecting to pay increased labor and benefits costs — in order of percentage increase — are: Nonmetallic Mineral Products; Transportation Equipment; Textile Mills; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Paper Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Chemical Products; Furniture & Related Products; Miscellaneous Manufacturing(a); Fabricated Metal Products; and Machinery.

Non-Manufacturing
Supply executives' expectation is for no change in labor and benefit costs for non-manufacturing industries in 2010. Thirty-eight percent of respondents expect such costs to increase by an average of 3.8 percent. Another 19 percent of respondents expect labor and benefit costs to shrink by an average of 7.9 percent, and 43 percent believe costs will remain stable during 2010. The 12 industries expecting increases in labor and benefit costs in 2010 over 2009 — in order of percentage increase — are: Mining; Accommodation & Food Services; Real Estate, Rental & Leasing; Utilities; Retail Trade; Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Professional, Scientific & Technical Services; Arts, Entertainment & Recreation; Other Services(b); Management of Companies & Support Services; and Wholesale Trade.

EMPLOYMENT

Change in Overall Employment

Manufacturing
ISM's Manufacturing Business Survey Committee members report that manufacturing employment decreased 7.1 percent since April 2009, and forecast that it will increase 1.5 percent in 2010. Thirty-two percent expect employment to be 8.4 percent higher, while 14 percent predict employment to be lower by 8.3 percent. The remaining 54 percent of respondents expect their employment levels to be unchanged in 2010. The 11 industries predicting increases in employment — in order of percentage increase — are: Transportation Equipment; Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing(a); Machinery; Textile Mills; Paper Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Printing & Related Support Activities; and Fabricated Metal Products.

Non-Manufacturing
ISM's Non-Manufacturing Business Survey Committee members report that non-manufacturing employment has decreased 4.9 percent since April 2009. Looking ahead to 2010, they forecast that employment will decrease 0.6 percent by the end of 2010. For 2010, 15 percent of respondents expect higher levels of employment, 27 percent anticipate lower levels, and 58 percent expect their employment levels to be unchanged. The four industries anticipating increases in their employment in 2010 are: Transportation & Warehousing; Mining; Professional, Scientific & Technical Services; and Retail Trade.

EXPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2010)

Manufacturing
The responses for this semiannual report indicate purchasers see increases in new export orders for the first half of 2010. This is consistent with the most recent ISM New Export Orders Index data in the monthly Manufacturing ISM Report On Business®, which has shown growth in new export orders in the last five months. Of the 77 percent of respondents who export, 64 percent predict an increase (60 percent moderate and 4 percent substantial) over the next half-year. Two percent of respondents (2 percent moderate and 0 percent substantial) predict a decrease in their exports, and 34 percent anticipate no change in exports over the next half-year. The 15 industries expecting growth in exports during the first half of 2010 — in order of percentage increase — are: Paper Products; Printing & Related Support Activities; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Chemical Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; Textile Mills; Miscellaneous Manufacturing(a); Primary Metals; and Machinery.

Non-Manufacturing
For the first half of 2010, non-manufacturing supply managers who report that their organizations engage in exporting feel less optimistic than they did one year ago concerning their export business. Of the 24 percent of non-manufacturing business survey respondents who report that they export, 15 percent predict an increase (15 percent moderate and 0 percent substantial) over the next half year. Fifteen percent of the respondents expect a decrease in their exports (15 percent moderate and 0 percent substantial), and 70 percent anticipate no change in exports over the next half year. Of the industries that report they export, the following three industries expect growth in export business in the first half of 2010: Professional, Scientific & Technical Services; Accommodation & Food Services; and Retail Trade.

IMPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2010)

Manufacturing
Purchasers expect an increase in imports in the first half of 2010. Of the 87 percent of purchasers who reported they import, 43 percent predict an increase in their imports over the next half year (37 percent moderate and 6 percent substantial), while 10 percent predict a decrease in imports of materials (9 percent moderate and 1 percent substantial). Slightly less than half of survey respondents (47 percent) expect no change in imports. The 14 industries expecting growth in imports — listed in order — are: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Wood Products; Transportation Equipment; Miscellaneous Manufacturing(a); Food, Beverage & Tobacco Products; Paper Products; Printing & Related Support Activities; Textile Mills; Electrical Equipment, Appliances & Components; Machinery; Fabricated Metal Products; and Chemical Products.

Non-Manufacturing
Non-manufacturers have higher expectations for the use of imports for the first half of 2010 than they did in December 2008 for the first half of 2009. Of the 46 percent of non-manufacturing organizations who reported they import, 28 percent (28 percent moderate and 0 percent substantial) predict an increase in their imports during the first half of 2010. Twelve percent of the respondents (10 percent moderate and 2 percent substantial) predict a decrease in imports of materials and services. The remaining 60 percent of purchasers expect no change in imports over the next half year. The six industries expecting growth in imports — listed in order — are: Other Services(b); Wholesale Trade; Agriculture, Forestry, Fishing & Hunting; Utilities; Professional, Scientific & Technical Services; and Retail Trade.

BUSINESS REVENUES

Business Revenues Comparison — 2009 vs. 2008

Manufacturing
Summarizing revenues for 2009, 22 percent of respondents say revenue was better than 2008, and that nominal (before adjusting for inflation) revenues increased an average of 20.3 percent over 2008. Conversely, 68 percent say their nominal revenues decreased in 2009 by an average of 22.1 percent, and the remaining 10 percent indicate no change. Purchasing and supply executives indicate an overall net nominal decrease of 10.7 percent in business revenues for 2009 over 2008. This is less than the 14.7 percent decrease that was forecast in April 2009 for all of 2009, and more than the 1.1 percent decrease predicted in December 2008 for all of 2009. The three industries reporting increases (highest to lowest) in revenues in 2009 are: Chemical Products; Miscellaneous Manufacturing(a); and Food, Beverage & Tobacco Products.

Non-Manufacturing
Non-manufacturing supply management executives report that business revenues for 2009 have decreased over 2008 by 4.5 percent. This is less than the 5.1 percent decrease predicted in April 2009 for all of 2009. This compares to a 0.7 percent increase reported one year ago for 2008 revenues over 2007 revenues. The 22 percent of respondents reporting better business in 2009 than in 2008 estimate an average nominal (before adjusting for inflation) revenue increase of 18.5 percent. This is in contrast to an average nominal decrease of 13.9 percent reported by the 62 percent of respondents who indicate worse business in 2009. The remaining 16 percent have experienced no change in 2009. The five industries reporting increases in revenues in 2009 are: Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Other Services(b); Retail Trade; and Health Care & Social Assistance.

Business Revenues Prediction for 2010

Manufacturing
Purchasers forecast that 2010 will be better than 2009 as measured by their revenue expectations. The 60 percent of respondents forecasting better business in 2010 than in 2009 estimate an average nominal (before adjusting for inflation) increase of 12 percent in their organizations’ revenues. This is in contrast to an average nominal decrease of 17.8 percent forecast by the 9 percent who predict worse business in 2010. Including the 31 percent who see no change in 2010, the forecast for overall net nominal increase in business revenues for 2010 over 2009 is 5.7 percent. The 13 manufacturing industries expecting improvement over 2009 — in order of percentage increase — are: Transportation Equipment; Nonmetallic Mineral Products; Printing & Related Support Activities; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Chemical Products; Machinery; Miscellaneous Manufacturing(a); Textile Mills; and Fabricated Metal Products.

Non-Manufacturing
Non-manufacturing survey respondents forecast that business revenues for 2010 will be slightly improved over 2009 by an average of 1.3 percent. This is substantially more than the 4.5 percent decrease reported for 2009, and also more than the 2.6 percent decrease reported one year ago for 2008 revenues over 2007 revenues. The 40 percent of respondents forecasting better business in 2010 than in 2009 estimate an average nominal (before adjusting for inflation) revenue increase of 9.2 percent. This is in contrast to an average nominal decrease of 10.3 percent forecast by the 23 percent who predict worse business in 2010. The remaining 37 percent see no change in 2010. The eight industries expecting increases in revenues in 2010 — in order of percentage increase — are: Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Finance & Insurance; Wholesale Trade; Retail Trade; Other Services(b); Information; and Agriculture, Forestry, Fishing & Hunting.

PROFIT MARGINS

Manufacturing
Survey respondents report that profit margins declined on average during the second and third quarters of 2009 as 34 percent experienced an increase in profit margins, 40 percent had lower margins, and 26 percent reported no change. However, expectations are for a slight growth between now and April of 2010 as 26 percent of respondents forecast better profit margins, 25 percent predict lower profit margins, and 49 percent predict no change.

Non-Manufacturing
Non-manufacturing supply management executives were asked about changes in profit margins that their organizations recently experienced and are expecting in the near future. Their responses indicate that 25 percent experienced an increase in profit margins during the second and third quarters of 2009, while 48 percent found smaller profit margins, and 27 percent had no change in margins during the same period. Looking ahead from now through April 2010, 33 percent of supply managers expect improved profit margins, 21 percent expect lower profit margins, and the remaining 46 percent of respondents anticipate no change in their profit margins.

BUSINESS COMPARISON

The First Half of 2010 with Last Half of 2009

Manufacturing
Looking ahead to the first half of 2010, survey respondents are optimistic about the next half year. Comparing their outlook for the first half of 2010 to the last half of 2009, 46 percent predict it will be better, 18 percent predict it will be worse, and 36 percent expect no change. Compared to the diffusion index for the same relative prediction one year ago (33 percent), respondents are significantly more optimistic about prospects in the manufacturing sector for the first half year (64 percent). The 14 industries expecting improvement in 2010 — listed in order — are: Paper Products; Plastics & Rubber Products; Primary Metals; Miscellaneous Manufacturing(a); Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Textile Mills; Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Transportation Equipment; Computer & Electronic Products; Chemical Products; Machinery; and Fabricated Metal Products.

Non-Manufacturing
The first half of 2010 is predicted to be stronger than the last half of 2009, according to non-manufacturing purchasing and supply managers. The diffusion index indicating current expectations is 62.5 percent. Forty percent of respondents expect the first half of next year to be better than the last half of this year, 15 percent anticipate it will be worse, and 45 percent predict no change. The 10 industries expecting improvement in the first half of 2010 — listed in order — are: Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Utilities; Accommodation & Food Services; Finance & Insurance; Other Services(b); Professional, Scientific & Technical Services; Wholesale Trade; Health Care & Social Assistance; and Retail Trade.

The Second Half of 2010 with the First Half of 2010

Manufacturing
Purchasing and supply executives are more optimistic about the second half of 2010 compared to the first half of the year. The percentage of survey respondents who forecast the second half of 2010 to be better than the first half is 50 percent, while 3 percent expect it to be worse, and 47 percent expect no change. The 15 industries predicting improvement in the second half of 2010 — listed in order — are: Transportation Equipment; Nonmetallic Mineral Products; Wood Products; Miscellaneous Manufacturing(a); Printing & Related Support Activities; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Primary Metals; Furniture & Related Products; Paper Products; Chemical Products; Machinery; and Computer & Electronic Products.

Non-Manufacturing
Comparing the second half of 2010 to the first half, non-manufacturing purchasing and supply executives feel more optimistic than they do for the first half of the year compared to the last half of 2009 (diffusion index of 71.5 percent compared to 62.5 percent). The percentage of respondents who currently forecast the second half of 2010 to be better than the first half is 55 percent, while 12 percent expect it to be worse. An additional 33 percent of purchasers expect no change. The 13 industries expecting improvement in the second half of the year — listed in order — are: Utilities; Real Estate, Rental & Leasing; Accommodation & Food Services; Retail Trade; Transportation & Warehousing; Wholesale Trade; Finance & Insurance; Construction; Information; Professional, Scientific & Technical Services; Arts, Entertainment & Recreation; Mining; and Health Care & Social Assistance.

SUPPLY CHAIN PRACTICES IN 2010

Manufacturing
In response to a special question regarding supply chain optimization, 71 percent of purchasing and supply executives plan to take new steps in 2010 to improve their supply chain management practices.

The favored approaches are listed below:

• Supplier consolidation
• New or improved enterprise technology and system utilization
• Improved inventory/asset management
• Lean manufacturing
• Cost reduction

Non-Manufacturing
Responding to a special question regarding supply chain improvements in 2010, 62 percent of respondents stated that they plan to take steps during the coming year to improve their supply chain management practices.

The five most frequently cited approaches are listed below:

• Strategic sourcing
• Product rationalization/demand management
• Supplier consolidation
• Improved inventory/asset management
• Spend analysis/consolidation

INVENTORY-TO-SALES RATIO

Manufacturing
Purchasers will be decreasing inventory on hand to support their planned level of sales during 2010. In this forecast, 13 percent expect to increase their purchased inventory-to-sales ratio during 2010. This is in contrast to 28 percent who expect the ratio to decrease, and 59 percent who predict no change. The diffusion index of 42.5 percent indicates the inventory-to-sales ratio will contract.

Non-Manufacturing
Of the 61 percent of non-manufacturing purchasers who answered this question, 9 percent anticipate increasing their purchased inventory-to-sales ratio during 2010. An additional 22 percent expect their ratio to drop, and 69 percent see no change. The diffusion index of 43.5 percent suggests the inventory-to-sales ratio will contract in 2010.

ECONOMIC CONCERNS

Manufacturing
Purchasers have a number of supply- and cost-related concerns on their list for 2010. The most frequently cited concerns are:

1. Weak economy

2. Healthcare and benefits costs

3. Credit crisis

4. Taxes

5. High energy costs

Non-Manufacturing
The number one economic concern of non-manufacturing supply management executives at the present time is the state of the overall economy. The most frequently cited concerns are:

1. Weak economy

2. Healthcare and benefits costs

3. Credit crisis

4. Labor costs

5. High energy costs

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing
Survey respondents are optimistic about the next 12 months, when compared to their response in December 2008. The 55 percent who report a better outlook is much greater than the 20 percent response received in December 2008. The 35 percent who report that the outlook is the same is up from the 22 percent reported in December 2008, and the 10 percent who indicated the outlook to be worse is lower than the 58 percent reported in December 2008.

Non-Manufacturing
Non-manufacturing survey respondents have a positive outlook now compared to when they looked ahead in December 2008. The 50 percent who currently report a better outlook is higher than the 16 percent who had that outlook in December 2008. Thirty percent expect no change, and 20 percent feel the outlook will be worse over the next 12 months.
 
U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2010 — Manufacturing Only

Manufacturing
Purchasing and supply executives are pessimistic concerning the prospective strength of the U.S. dollar for 2010. The average diffusion index for this forecast is 40.5 percent, significantly weaker than the December 2008 forecast average of 71 percent. The U.S. dollar is expected to weaken against all of the major currencies.

SUMMARY

Manufacturing
The manufacturing sector is currently contracting, and the forecast indicates that it will continue to contract with significant improvement in the second half of 2009.

• Operating rate is 70.1 percent.

• Production capacity decreased by 5 percent in 2009.

• Production capacity is expected to increase by 2.7 percent in 2010.

• Capital expenditures decreased 7.8 percent in 2009.

• Capital expenditures are expected to decrease 4 percent in 2010.

• Prices paid decreased 4.6 percent in 2009.

• Overall 2010 prices paid are expected to increase 2.6 percent.

• Labor and benefit costs are expected to increase 1.4 percent in 2010.

• Manufacturing employment is expected to increase 1.5 percent in 2010.

• Expect growth in U.S. exports in 2010.

• Expect growth in U.S. imports in 2010.

• Manufacturing revenues (nominal) are down 10.7 percent in 2009.

• Manufacturing revenues (nominal) are expected to increase 5.7 percent in 2010.

• Major concerns to manufacturers: weak economy; healthcare and benefits costs; credit crisis; taxes; and high energy costs.

• The U.S. dollar is expected to weaken on average versus major trading partner currencies in 2010.

• Overall attitude of manufacturing management: optimistic, with 90 percent of respondents predicting 2010 will be the same as or better than 2009.

Non-Manufacturing
The non-manufacturing sector continues to expand and the forecast indicates an increased rate of expansion in 2010.

• Operating rate is currently 81.3 percent.

• Production capacity decreased 1.4 percent in 2009.

• Production and provision capacity is expected to increase 0.9 percent in 2010.

• Capital expenditures decreased 4.2 percent in 2009.

• Capital expenditures are expected to decrease 6.7 percent in 2010.

• Prices paid decreased 2.2 percent in 2009.

• Prices paid are expected to increase 1.1 percent in 2010.

• Labor and benefit costs are expected to remain the same in 2010.

• Non-manufacturing employment is expected to decrease 0.6 percent in 2010.

• Expect export levels to remain unchanged in 2010.

• Expect import growth in 2010.

• Non-manufacturing revenues (nominal) are down 4.5 percent in 2009.

• Non-manufacturing revenues (nominal) are expected to rise 1.3 percent in 2010.

• Major concerns to non-manufacturers: weak economy; healthcare and benefits costs; credit crisis; labor costs; and high energy costs.

• Overall attitude of non-manufacturing supply managers: mostly positive outlook, with 80 percent of respondents predicting 2010 will be the same as or better than 2009.

(a) Miscellaneous Manufacturing includes items such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies.

(b) Other Services include services such as equipment and machinery repairing; promoting or administering religious activities; grant making; advocacy; and providing dry-cleaning and laundry services, personal care services, death care services, pet care services, photofinishing services, temporary parking services, and dating services.

In addition to the forecast, the Manufacturing ISM Report On Business® is issued monthly and is considered by many economists to be the most reliable near-term economic barometer available. It is reviewed regularly by government agencies and economic business leaders. The report, compiled from responses to questions asked of purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, imports, exports, backlog of orders, employment, customers’ inventories, buying policies and prices. The report has been issued by the association since 1931, except during World War II.

Covering the non-manufacturing sector, ISM debuted the Non-Manufacturing ISM Report On Business® in June 1998. The Non-Manufacturing ISM Report On Business® is released on the third business day of each month, and is based on data received from purchasing and supply executives across the country. The report covers business activity, new orders, backlog of orders, new export orders, inventory change, inventory sentiment, imports, prices, employment, and supplier deliveries.

The Manufacturing and Non-Manufacturing ISM Report On Business® is published monthly by the Institute for Supply Management™. The Institute for Supply Management™, established in 1915, is the largest supply management organization in the world as well as one of the most respected. ISM’s mission is to lead the supply management profession through its standards of excellence, research, promotional activities and education.
 

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