NEWS RELEASE

FOR RELEASE:  9:00 A.M. ET DECEMBER 8, 2004

(Tempe, AZ) — Economic growth in the U.S. will strengthen in 2005, say the nation's purchasing and supply executives in their 68th Semiannual Economic Forecast. Expectations for 2005 are higher in both the manufacturing and non-manufacturing sectors, and both sectors are more optimistic about the coming year than they were one year ago for 2004. The overall prediction is for economic growth to continue at a relatively strong level in 2005.

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, C.P.M., chair of the ISM Manufacturing Business Survey Committee and group director, strategic sourcing and procurement, Georgia-Pacific Corporation; and by Ralph G. Kauffman, Ph.D., C.P.M., chair of the ISM Non-Manufacturing Business Survey Committee and coordinator of the purchasing and supply management program at the University of Houston-Downtown.

Manufacturing Summary

Expectations for 2005 are high as 75 percent of survey respondents expect revenues to be greater in 2005 than in 2004. The panel of purchasing and supply executives expects a 7.8 percent net increase in overall revenues for 2005, compared to an increase of 8.3 percent increase reported for 2004. Manufacturing industries expecting the greatest improvement over 2004 are — listed in order — Miscellaneous*; Glass, Stone & Aggregate; Fabricated Metals; Primary Metals; Instruments & Photographic Equipment; Transportation & Equipment; Apparel; and Electronic Components & Equipment.

"Manufacturing purchasing and supply executives are optimistic about their organizations' prospects for the first half, and predict additional growth during the second half of 2005," said Ore. "While 2004 has been a particularly strong year overall, it has presented challenges with regard to inflation in manufacturing costs. At present, the sector continues to recover from major influences that stalled growth early in the millennium. Manufacturing seemingly has reasonable momentum at this point, with continuing strength in new orders and production, and is in its 18th consecutive month of growth as reported in the monthly Manufacturing ISM Report On Business®."

In the sector, respondents report operating at 83 percent of their normal capacity, down from 85.6 percent reported in April 2004. Purchasing and supply executives predict that capital expenditures will increase only 1.6 percent in 2005, compared to the 15.1 percent increase reported for 2004. Survey respondents also forecast that they will increase their purchased inventory to sales ratio in 2005. Manufacturers have an expectation that employment in the sector will grow by 1.6 percent, while labor and benefits costs are expected to increase an average of 3.4 percent. Manufacturing purchasers are predicting growth in exports and imports. They also expect the U.S. dollar to strengthen somewhat against currencies of major trading partners.

They predict the prices they pay will increase 4.3 percent during the first four months of 2005, and will increase an additional 0.1 percent for the balance of 2005. Respondents' major concerns are: prices and inflation; energy price increases; weak economy; effects of war and geopolitical concerns; and labor, benefits and healthcare costs, including labor shortages.

A special question was asked to determine the respondents' progress in achieving efficiency from the application of technology to supply management. While a few companies rate themselves as being almost finished, 82 percent are less than three-fourths complete in achieving efficiency from the application of technology, while 47 percent indicate they are less than 50 percent complete. Members expect to realize supply chain improvements through supplier relationship enhancements; process, tools, systems, and software improvements; and the application of electronic commerce.

Non-Manufacturing Summary

Sixty-six percent of non-manufacturing purchasing and supply executives expect their 2005 revenues to be greater than in 2004. They currently expect a 5.9 percent net increase in overall revenues compared to a 6.4 percent increase reported for 2004. Non-manufacturing industries expecting the greatest improvement over 2004 are — listed in order — Transportation; Business Services; Entertainment; Mining; and Other Services**.

"Non-manufacturing purchasers report operating at 88.2 percent of their normal capacity, somewhat above the 85.4 percent reported in April 2004 and the 85.6 percent reported in December 2003. They have a slightly higher level of optimism about the next 12 months than they had in April and are much more optimistic than they were one year ago in December 2003," said Kauffman. "While they forecast that their capacity to produce products and provide services will rise by 4.4 percent during 2005, capital expenditures are expected to increase by only 1.8 percent. This is a drop from the 4.5 percent increase reported for 2004. Non-manufacturers also predict that their employment will grow by 3.1 percent during 2005. Their major economic concerns are: energy price increases; prices and inflation; labor, benefits and healthcare costs, including labor shortages; weak economy; and effects of war and geopolitical concerns."

Purchasers in non-manufacturing industries expect that the prices they pay for materials and services will increase by a significant 3.6 percent during 2005. They also forecast a 3.7 percent increase in their overall labor and benefit costs for 2005. Profit margins are reported to have increased in the period since April 2004, and members expect them to rise additionally in the period November 2004 to April 2005. Members indicate that they have achieved an average 50 percent of potential benefits from application of technology to supply chains and that application of e-commerce; process, tools, systems and software improvements; and increased consolidation, centralization and control of supply management activities are their major means of improving supply chains in 2005. Overall they expect business in the first half of 2005 to be better than the second half of 2004, and the second half of 2005 to be better than the first half of the year.

OPERATING RATE

Manufacturing

Purchasing and supply executives report that their companies are currently operating at 83 percent of normal capacity. This is a decrease from May 2004 (85.6 percent) and is greater than the rate of 80.1 percent reported in December 2003. It is also significantly less than the nine-year high reported in May 2000 (87.4 percent). Recent monthly data from the Manufacturing ISM Report On Business® indicates the manufacturing sector has grown for 18 consecutive months. The following 13 industries are operating at or above the average capacity rate of 83 percent: Apparel; Miscellaneous*; Glass, Stone & Aggregate; Food; Paper; Printing & Publishing; Wood & Wood Products; Instruments & Photographic Equipment; Textiles; Electronic Components & Equipment; Furniture; Industrial & Commercial Equipment & Computers; and Primary Metals.

Non-Manufacturing

Non-manufacturing purchasing and supply executives report that their organizations are currently operating at 88.2 percent of normal capacity. This is somewhat higher than both the 85.4 percent reported in April 2004 and the 85.6 percent reported in December 2003. 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 increase their utilization of capacity at the same time. The following industries are operating at capacity levels above the 88.2 percent average: Legal Services; Utilities; Real Estate; Public Administration; Mining; Other Services**; Agriculture; Health Services; and Transportation.

PRODUCTION CAPACITY — December 2004

Manufacturing

Production capacity in manufacturing increased 4 percent in 2004 as 52 percent of purchasing and supply executives reported an average capacity increase of 11.6 percent, 9 percent reported decreases averaging 23.6 percent, and 39 percent reported no change. This compares to a reported capacity increase of 1.2 percent for all of 2003, and a predicted increase of 3.8 percent for 2004 made in December 2003. The industries reporting additions of 4 percent or higher to their capacity in 2004 are: Wood & Wood Products; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Food; Primary Metals; Apparel; Electronic Components & Equipment; Fabricated Metals; and Rubber & Plastic Products. Expectations for 2005 are for an increase of 5.6 percent.

The principal means of achieving increases in production capacity in 2004 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 increased 3.1 percent during 2004. This equals the 3.1 percent increase reported in December 2003 for 2003, and is less than the prediction in April 2004 of a 4.2 percent increase in 2004. For 2004, 39 percent of non-manufacturing purchasers indicate increases averaging 9.3 percent, and 4 percent of respondents indicate decreases averaging 13 percent. Fifty-seven percent see no change in their capacity. The industries reporting additions of more than 3 percent to their capacity in 2004 are: Mining; Utilities; Other Services**; Business Services; Construction; Communication; and Health Services. Expectations for 2005 are for an increase of 4.4 percent.

The principal means of achieving increases in production capacity in 2004 were (in order of importance):

1. Additional personnel (permanent, temporary or contract)
2. More hours worked with existing personnel
3. Replaced equipment with technically advanced equipment
4. Additional plant and/or equipment
5. More shifts worked with existing personnel

CAPITAL EXPENDITURES — 2004 vs. 2003

Manufacturing

Purchasing and supply managers report capital expenditures in 2004 rose 15.1 percent when compared to 2003 levels. The report for 2004 significantly exceeds panel members' expectations as they predicted an increase of 6 percent for 2004 in the April 2004 forecast. The 42 percent of purchasers who reported increased capital expenditures in 2004 indicated an average increase of 47.8 percent, while the 16 percent who said their capital spending was reduced reported an average decrease of 34 percent. Forty-two percent said they spent the same in 2004 as in 2003. Industries showing above average increases in capital expenditures for 2004 — in order of percentage increase — are: Primary Metals; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; and Glass, Stone & Aggregate.

Non-Manufacturing

Non-manufacturing purchasing and supply executives report their level of capital expenditures in 2004 compared to 2003 rose by 4.5 percent. This is slightly less than the 4.9 percent increase predicted by members in April 2004, but is significantly stronger than the 2.2 percent increase reported for 2003 one year ago. Forty-four percent of members report increases averaging 17.6 percent. An additional 12 percent report decreases averaging 24.8 percent. However, another 44 percent indicate they spent the same on capital expenditures in 2004 as in 2003. Industries experiencing above average increases in capital expenditures in 2004 are: Communication; Utilities; Insurance; Finance & Banking; Health Services; Business Services; Wholesale Trade; and Entertainment.

PREDICTED CAPITAL EXPENDITURES — 2005 vs. 2004

Manufacturing

Looking forward to 2005, purchasing and supply executives are quite pessimistic with regard to expectations for capital expenditures compared to 2004. The 42 percent of members expecting to spend more on capital expenditures in 2005 predict an average increase of 23.4 percent. However, 21 percent expect a decrease averaging 38 percent. Considering the 37 percent who expect to spend the same on capital expenditures in both years, the overall net average change forecast for 2004 is an increase of 1.6 percent. Twelve industries expect higher than average capital expenditures in 2005: Leather; Miscellaneous*; Food; Rubber & Plastic Products; Wood & Wood Products; Primary Metals; Glass, Stone & Aggregate; Paper; Industrial & Commercial Equipment & Computers; Instruments & Photographic Equipment; Transportation & Equipment; and Apparel.

Non-Manufacturing

Looking out into 2005, non-manufacturing purchasing and supply executives are expecting a much lower increase in capital expenditures than they are reporting for 2004. The 42 percent of members expecting to spend more predict an average increase of 14.2 percent. An additional 15 percent anticipate a decrease averaging 26.1 percent. Forty-three percent expect to spend the same on capital expenditures in 2005 as in 2004. Industries expecting above average increases in capital expenditures in 2005 are: Entertainment; Finance & Banking; Mining; Communication; Insurance; Business Services; Health Services; Wholesale Trade; and Other Services**.

PRICES — Changes Between End of 2003 and End of 2004

Manufacturing

After an initial forecast in December 2003 of a slight increase in prices paid during 2004, purchasers stated their expectation of a larger increase (7.6 percent) in ISM's April 2004 report. They now report an expected increase of 11.2 percent for all of 2004. The 88 percent who say their prices are higher now than at the end of 2003 report an average increase of 13.2 percent, while the 7 percent who report lower prices averaged a 5.3 percent decrease. The remaining 5 percent indicate no change for all of 2004. The industries reporting the highest rates of price increases in 2004 are: Primary Metals; Fabricated Metals; Apparel; Transportation & Equipment; and Textiles.

Non-Manufacturing

As 2004 draws to a close, non-manufacturing purchasers report prices they pay have increased by 4.8 percent over the entire year. This is slightly more than the 4.5 percent increase they predicted in April 2004. Seventy-one percent of purchasers report price increases averaging 7.4 percent. Four percent of purchasers indicate decreased prices with an average reduction of 11.5 percent, and 25 percent of members have not experienced overall price changes this year. Industries reporting the highest rates of price increases in 2004 are: Construction; Wholesale Trade; Agriculture; Real Estate; Utilities; Retail Trade; and Public Administration.

Manufacturing

Sixty-eight percent of purchasing and supply managers expect the prices they pay to increase in the first part of 2005 by an average of 7.5 percent. At the same time, 13 percent anticipate decreases averaging 6.1 percent. Including the 19 percent who expect no change in prices in the first four months of 2005, purchasers expect the net average overall price change to increase 4.3 percent for the period. The industries predicting higher than average price increases are: Primary Metals; Paper; Transportation & Equipment; Rubber & Plastic Products; Miscellaneous*; Glass, Stone & Aggregate; Wood & Wood Products; Printing & Publishing; and Chemicals.

Non-Manufacturing

Non-manufacturing members predict that their purchases in the first four months of 2005 will cost an average of 2.7 percent more than at the end of 2004. This is a relatively strong rate of increase in prices for a four-month period compared to recent years. However, considering the prediction of price change for all of 2005 in the next section, purchasing and supply executives apparently expect most of 2005's price increase to occur in the first part of the year. Sixty-eight percent of non-manufacturing purchasers predict the prices they pay will increase an average of 4.9 percent in the first part of 2005. Also, 7 percent expect price decreases averaging 8.4 percent. The remaining 25 percent indicate no change in prices in the first four months of 2005. Industries reporting the largest increase in prices they pay in the first part of 2005 are: Construction; Legal Services; Wholesale Trade; Public Administration; Communication; Transportation; Utilities; Retail Trade; and Business Services.

PRICES — Predicted Changes Between End of 2004 and End of 2005

Manufacturing

The forecast indicates respondents expect higher prices in 2005, with 69 percent expecting an average price increase of 7.8 percent, while 16 percent expect an average decline of 6.5 percent. The remaining 15 percent expect no change in their average prices paid for the coming year. The net average of the responses indicates an increase of 4.4 percent overall by the end of 2005. Industries expecting to pay above average prices by the end of 2005 are: Miscellaneous*; Transportation & Equipment; Paper; Rubber & Plastic Products; Glass, Stone & Aggregate; Primary Metals; Chemicals; Textiles; and Apparel.

Non-Manufacturing

For all of 2005, non-manufacturing purchasing and supply executives expect their prices to rise an average 3.6 percent. Seventy-one percent expect increases averaging 6 percent, 10 percent anticipate prices to drop an average 6.2 percent, and 19 percent foresee no change in prices during the next year. Industries expecting to pay above average price increases by the end of 2005 are: Construction; Wholesale Trade; Public Administration; Legal Services; Real Estate; Mining; Business Services; and Utilities.

LABOR AND BENEFIT COSTS — Predicted Rate Change End of 2004 vs. End of 2005

Manufacturing

Purchasing and supply executives' expectations for change in overall labor and benefit costs for 2005 (3.4 percent) are significantly higher than they were predicted in December 2003 (2.7 percent) for 2004. Eighty-two percent of members expect increased labor and benefit costs and expect them to grow by an average of 4.3 percent for all of 2005, while the 2 percent forecasting lower costs see them decreasing by an average of 6.7 percent. Considering the 16 percent who believe costs will remain stable, the expected overall net rate of increase is 3.4 percent between the end of 2004 and the end of 2005. Industries expecting to pay 3.4 percent or higher are: Textiles; Fabricated Metals; Wood & Wood Products; Chemicals; Miscellaneous*; Primary Metals; and Electronic Components & Equipment.

Non-Manufacturing

Purchasing and supply executives' expectations for change in labor and benefit costs for non-manufacturing industries in 2005 are for an increase of 3.7 percent. Eighty-two percent of respondents expect such costs to increase by an average 4.8 percent. Another 2 percent of purchasers expect labor and benefit costs to shrink by an average 8.7 percent, and 16 percent believe costs will remain stable during 2005. Industries expecting average or above increases in labor and benefit costs in 2005 are: Insurance; Entertainment; Utilities; Wholesale Trade; Agriculture; Health Services; Finance & Banking; Construction; Business Services; and Public Administration.

EMPLOYMENT — Change in Overall Employment

Manufacturing

ISM's Manufacturing Business Survey Committee members report that manufacturing employment has increased 1.7 percent since April 2004. For 2005, they forecast that manufacturing employment will increase slightly, by 1.6 percent, with 40 percent expecting employment to be 8.7 percent higher. This is compared to the 14 percent who predict employment to be lower by 12.6 percent. The remaining 46 percent of members expect their employment levels to be unchanged in 2005. The nine industries predicting 1.6 percent growth or greater in employment are: Miscellaneous*; Instruments & Photographic Equipment; Transportation & Equipment; Primary Metals; Food; Apparel; Rubber & Plastic Products; Wood & Wood Products; and Furniture.

Non-Manufacturing

ISM's Non-Manufacturing Business Survey Committee members report that non-manufacturing employment has increased 1.8 percent since April 2004. Looking ahead to 2005, they forecast that employment will increase 3.1 percent by year end. For 2005, 46 percent expect higher levels of employment, 10 percent of members anticipate lower levels, and 44 percent expect their employment levels to be unchanged. Industries anticipating above average increases in their employment in 2005 are: Communication; Finance & Banking; Retail Trade; Business Services; and Other Services**.

Note: A diffusion index above 50 percent would generally indicate an expectation of higher employment; below 50 percent, an expectation of lower employment.

EXPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2005)

Manufacturing

The responses for this semiannual report indicate purchasers are optimistic about new export orders for the first half of 2005. This is consistent with recent ISM New Export Orders Index data in the monthly Manufacturing ISM Report On Business®, which has shown a growth in new export orders for the last 24 months. Of the 82 percent of members who export, 50 percent predict an increase (43 percent moderate and 7 percent substantial) over the next half year. Additionally, 4 percent (3 percent moderate, 1 percent substantial) see a decrease in their exports, and 46 percent anticipate no change in exports over the next half-year. Eight industries expect above average growth in exports: Miscellaneous*; Instruments & Photographic Equipment; Furniture; Transportation & Equipment; Textiles; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; and Electronic Components & Equipment.

Non-Manufacturing

For the next half year, non-manufacturing purchasing and supply executives who report that their organizations engage in exporting feel more optimistic than they did in either December 2003 or April 2004 concerning their export business. Of the 21 percent of non-manufacturing business survey respondents who report that they export, 55 percent predict an increase (52 percent moderate and 3 percent substantial) over the next half year. Three percent of members see a decrease in their exports (0 percent moderate and 3 percent substantial), and 42 percent anticipate no change in exports over the next half year. Of the industries that report they export, the following expect growth in export business in the first half of 2005: Communication; Construction; Wholesale Trade; Retail Trade; Business Services; Agriculture; and Other Services**.

IMPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2005)

Manufacturing

Purchasers expect continued growth in imports in the first half of 2005. Of the 85 percent of purchasers who import, 60 percent predict an increase in their imports over the next half-year (42 percent moderate and 18 percent substantial), while 5 percent predict a decrease in imports of materials (5 percent moderate and 0 percent substantial). Slightly more than one-third of survey members (35 percent) expect no change in imports. Industries expecting above average growth in imports are: Printing & Publishing; Textiles; Apparel; Fabricated Metals; Furniture; Industrial & Commercial Equipment & Computers; Miscellaneous*; Electronic Components & Equipment; Transportation & Equipment; and Rubber & Plastic Products.

Non-Manufacturing

Non-manufacturers have about the same expectation for use of imports for the next half year that they did in April 2004 for the second half of 2004. Of the 38 percent of non-manufacturing organizations that import, 46 percent (36 percent moderate and 10 percent substantial) predict an increase in their imports during the first half of 2005. Nine percent (7 percent moderate and 2 percent substantial) predict a decrease in imports of materials and services. The remaining 45 percent of purchasers expect no change in imports over the next half year. Industries expecting growth in imports are: Transportation; Other Services**; Construction; Entertainment; Health Services; Mining; Wholesale Trade; Business Services; Retail Trade; Utilities; and Communication.

BUSINESS REVENUES

Business Revenues Comparison — 2004 vs. 2003

Manufacturing

Summarizing revenues for 2004, 70 percent say revenue was better than 2003, and their nominal (before adjusting for inflation) revenues increased an average of 14.3 percent. Conversely, 14 percent say their nominal revenues decreased in 2004 by an average of 13 percent, and the remaining 16 percent indicate no change. Purchasing and supply executives indicate an overall net nominal increase of 8.3 percent in business revenues for 2004 over 2003. This is lower than the 9.7 percent increase which was forecast in April 2004 for all of 2004, and significantly higher than the 5.8 percent increase predicted in December 2003 for all of 2004. The industries reporting the largest percentage increase in revenues in 2004 are: Glass, Stone & Aggregate; Apparel; Primary Metals; Furniture; and Miscellaneous*.

Non-Manufacturing

Non-manufacturing purchasers report that business revenues for 2004 are improved over 2003 by an average of 6.4 percent. This is slightly higher than the 6.3 percent increase predicted in April 2004 for 2004 and somewhat higher than the 4.6 percent increase reported one year ago for 2003 revenues over 2002 revenues. The 68 percent of members reporting better business in 2004 than in 2003 estimate an average nominal (before adjusting for inflation) revenue increase of 11.5 percent. This compares to an average nominal decrease of 13.4 percent reported by the 9 percent who indicate lower revenues in 2004. The remaining 23 percent have experienced no change in revenue in 2004 over 2003. Industries reporting the largest percentage increase in revenues in 2004 are: Agriculture; Transportation; Mining; Business Services; Wholesale Trade; Finance & Banking; and Insurance.

Business Revenues Prediction for 2005

Manufacturing

Purchasers forecast that revenues will be strong in 2005 compared to 2004, but down slightly when compared to 2004 revenue over 2003. The 75 percent of members forecasting better business in 2005 than in 2004 estimate an average nominal (before adjusting for inflation) increase of 12.2 percent in their companies' revenues. This compares to an average nominal decrease of 21.1 percent forecast by the 6 percent who predict lower revenues in 2005. Including the 19 percent who see no change in 2005, the forecast for overall net nominal growth in business revenues for 2005 over 2004 is 7.8 percent. The industries predicting growth greater than 7.8 percent in nominal revenues in 2005 are: Miscellaneous*; Glass, Stone & Aggregate; Fabricated Metals; Primary Metals; Instruments & Photographic Equipment; Transportation & Equipment; Apparel; and Electronic Components & Equipment.

Non-Manufacturing

Non-manufacturing purchasers forecast that business revenues for 2005 will be improved over 2004 by 5.9 percent. This is lower than the 6.4 percent increase reported for 2004 but higher than the 4.6 percent increase reported for 2003 revenues over 2002 revenues. The 66 percent of members forecasting better business in 2005 than in 2004 estimate an average nominal (before adjusting for inflation) revenue increase of 10.1 percent. This compares to an average nominal decrease of 12 percent forecast by the 7 percent who predict lower revenues in 2005. The remaining 27 percent see no change in 2005. Industries expecting above average increases in revenues in 2005 are: Transportation; Business Services; Entertainment; Mining; Other Services**; Communication; Insurance; Real Estate; Retail Trade; and Wholesale Trade.

PROFIT MARGINS

Manufacturing

Survey respondents report that profit margins have declined on average during the second and third quarters of 2004 as 34 percent experienced an increase in profit margins, while a larger number (42 percent) had lower margins, and 24 percent reported no change. However, their expectations are for significant increases between now and April of 2005 as 39 percent predict better profit margins (an increase of 5 percentage points), 21 percent predict lower margins (a decrease of 21 percentage points), and 40 percent predict no change (an increase of 16 percentage points). Industries expecting to increase margins in 2005 are: Glass, Stone & Aggregate; Miscellaneous*; Food; Apparel; Chemicals; Fabricated Metals; Transportation & Equipment; Electronic Components & Equipment; and Industrial & Commercial Equipment & Computers.

Non-Manufacturing

Non-manufacturing purchasing and supply executives were asked about changes in profit margins that their organizations recently experienced or were expecting in the near future. Their response indicated that 30 percent experienced an increase in profit margins during the April 2004 to September 2004 period, while 24 percent found smaller profit margins and 46 percent had no change in margins during the same period. Looking ahead over the November 2004 to April 2005 period, 37 percent of supply managers expect improved margins, only 13 percent expect lower profit margins, and the remaining 50 percent of members anticipate no change in their profit margins.

BUSINESS COMPARISON

The First Half of 2005 with Last Half of 2004

Manufacturing

Looking ahead to the next half year, members are optimistic about the next half year. When comparing their outlook for the first half of 2005 to the last half of 2004, 52 percent predict it will be better, 15 percent predict it will be worse, and 33 percent expect no change. Compared to the diffusion index of one year ago (75.5 percent) that reflected the same relative period, members are less optimistic about prospects in the manufacturing sector for the first half-year (68.5 percent). The industries expecting the highest rate of improvement in the first half of 2005 are: Leather; Electronic Components & Equipment; Rubber & Plastic Products; Furniture; and Industrial & Commercial Equipment & Computers.

Non-Manufacturing

The first half of 2005 is looking better than the last half of 2004, according to non-manufacturing purchasing and supply managers. The diffusion index indicating current expectations is 70.5 percent. Fifty percent of members expect the first half of next year to be better than the last half of this year, 9 percent anticipate it will be worse, and 41 percent predict no change. The industries expecting the most improvement in the first half of 2005 are: Entertainment; Mining; Communication; Other Services**; Business Services; Utilities; and Transportation.

Note: A diffusion index above 50 percent would generally indicate an expectation of the first half of the coming year being better than the second half of the current year.

The Second Half of 2005 with the First Half of 2005

Manufacturing

Purchasing and supply executives are slightly more optimistic about the second half of 2005 compared to the first half of the year. The proportion of members who forecast the second half of 2004 to be better than the first half is 45 percent, while 7 percent expect it to be worse, and 48 percent expect no change. The industries predicting the largest rate of improvement in the second half of 2005 are: Miscellaneous*; Leather; Glass, Stone & Aggregate; Fabricated Metals; and Transportation & Equipment.

Non-Manufacturing

Comparing the second half of 2005 to the first half, non-manufacturing purchasing and supply executives feel slightly more optimistic than they do for the first half of the year compared to the last half of 2004 (diffusion index of 73 percent compared to 70.5 percent). The proportion of members who currently forecast the second half of 2005 to be better than the first half is 50 percent, while 4 percent expect it to be worse. An additional 46 percent of purchasers expect no change. The industries expecting the greatest improvement in the second half of the year are: Transportation; Legal Services; Business Services; Other Services**; and Health Services.

Note: A diffusion index above 50 percent would generally indicate an expectation of the second half of the coming year being better than the first half.

SUPPLY CHAIN PRACTICES IN 2005

Manufacturing

In response to a special question regarding supply chain optimization, 74 percent of purchasing and supply executives plan to take new steps in 2005 to improve their supply chain management practices. Enhancing supplier relationships is at the top of the list for 2005. Systems improvements such as new systems and implementing new tools (including forecasting and planning), processes and software is second on the list. Application of electronic commerce solutions; rationalizing the supplier base; and reducing costs are the other major issues of concern to supply managers.

1. Supplier Relationship Enhancements
2. Process, Tools, Systems and Software Improvements
3. Application of Electronic Commerce
4. Supply Base Rationalization
5. Cost Reduction

Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2005, 67 percent of members stated that they plan to take steps during the current year to improve their supply chain management practices. Members' first choice is new or increased application of various aspects of e-commerce. Following that preference, members indicated other initiatives as listed below:

1. Application of Electronic Commerce
2. Process, Tools, Systems and Software Improvements
3. Increased Consolidation, Centralization and Control of Supply Management Activities
4. Supplier Relationship Enhancements
5. Supply Base Rationalization

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers will be increasing inventory on hand to support their planned level of sales during 2005. In this forecast, 15 percent expect to reduce their purchased inventory-to-sales ratio during 2005. This compares to 20 percent who expect the ratio to grow and 65 percent who predict no change.

Non-Manufacturing

Of the 55 percent of non-manufacturing purchasers who answered this question, 14 percent anticipate increasing their purchased inventory-to-sales ratio during 2005. An additional 10 percent expect their ratio to drop and 76 percent see no change. The diffusion index of 52 percent suggests continued building of inventories in 2005 but at a relatively slow rate of increase.

Note: A diffusion index above 50 percent would indicate an increase in the inventory-to-sales ratio; below 50 percent, a decrease in the ratio.

EXPECTATIONS FOR HOLIDAY RETAIL SALES

Manufacturing

Each year, we ask purchasers to assess prospects for holiday sales in their geographic area. Compared to 2003, respondents expect significant improvement as 41 percent expect "good" holiday sales. Over half (55 percent) expect them to be "average," while 4 percent expect them to be "poor."

Non-Manufacturing

Non-manufacturing purchasing and supply executives expect a less robust holiday sales season for 2004 than they did for 2003 as 31 percent expect "good" sales for 2004 while 41 percent anticipated "good" sales in 2003. Almost two-thirds of members (65 percent) forecast an "average" sales season this year and 4 percent expect a "poor" year.

ECONOMIC CONCERNS

Manufacturing

It has been quite some time since Inflation has led the list of concerns, but it is definitely back and a concern to survey members. Energy, one of the major drivers of inflation, is the second concern, so it is obvious that cost issues are of great concern at this time. A weak economy is the next concern followed by effects of war and geopolitical concerns; and labor, benefits and healthcare costs, including labor shortages complete the list. While the list is quite broad, the responses are dominated by concerns focusing on cost pressures and supply chain constraints.

1. Prices and Inflation
2. Energy Price Increases
3. Weak Economy
4. Effects of War and Geopolitical Concerns
5. Labor, Benefits and Healthcare Costs, including Labor Shortages

Non-Manufacturing

The number one economic concern of non-manufacturing purchasing and supply executives at the present time is energy costs. Other concerns include: price increases other than energy; employment labor and benefit costs, particularly healthcare costs; weak economy; and effects of war and geopolitical concerns. The top five responses in order of importance are:

1. Energy Price Increases
2. Prices and Inflation
3. Labor, Benefits and Healthcare Costs, including Labor Shortages
4. Weak Economy
5. Effects of War and Geopolitical Concerns

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Members' companies are optimistic about the next 12 months, but not as bullish when compared to their responses in April 2004 and December 2003. The 63 percent who report a better outlook is less than the 70 percent response received in April 2004. The 28 percent who report that the outlook is the same is up from the 20 percent reported in April 2004, and the 9 percent who indicated the outlook to be worse is lower than the 10 percent reported in April 2004.

Non-Manufacturing

Non-manufacturing survey members' organizations have a higher degree of optimism now than they had in either April 2004 or December of 2003. The 63 percent who currently report a better outlook is about the same as the 64 percent who had that outlook in April 2004 as well as one year ago. Thirty-three percent expect no change in the outlook and 4 percent feel the outlook will be worse over the next 12 months.

U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2005 — Manufacturing Only

Manufacturing

Purchasing and supply executives remain moderately optimistic concerning the prospective strength of the U.S. dollar for 2005. The average diffusion index for this forecast is 53 percent, the same as the December 2003 forecast. Of the seven currencies, the U.S. dollar is expected to be weaker than British Pound.

Note: A diffusion index above 50 percent would predict a generally stronger U.S. dollar; below 50 percent, a generally weaker U.S. dollar, with the distance from 50 percent indicative of the predicted strength or weakness.

Benefits of Applying Technology

Manufacturing

A special question was asked to determine the progress of organizations in achieving efficiencies from the application of technology to supply management. Approximately 82 percent of respondents indicate they are less than three-fourths complete in achieving benefits from applying technology, and 47 percent indicate they are less than 50 percent complete. It is obvious from this data that there is still significant improvement to be gained from the application of technology.

Non-Manufacturing

Survey respondents were asked a special question concerning the realized proportion of potential supply chain efficiencies that could ultimately be gained from applying technology to their supply chain. The average response from non-manufacturing members was 50 percent, indicating that, on average, 50 percent of potential improvement is yet to be gained. While 28 percent of respondents have achieved at least 75 percent of their expected potential benefit, the remaining 72 percent still have significant benefits to gain.

SUMMARY

Manufacturing

• Operating rate is currently 83 percent of normal capacity.
• Capital expenditures increased 15.1 percent in 2004.
• Capital expenditures will increase 1.6 percent in 2005.
• Production capacity will increase 5.6 percent during 2005.
• Prices paid increased 11.2 percent during 2004.
• Overall 2005 prices will increase 4.4 percent from 2004.
• Labor and benefits costs will increase at a 3.4 percentage rate in 2005.
• Manufacturing employment will increase 1.6 percent in 2005.
• The U.S. dollar is expected to strengthen somewhat against currencies of major trading partners.
• Expect strong Export growth in 2005.
• Expect strong Import growth in 2005.
• Holiday retail sales as viewed by purchasers will be significantly improved over 2003.
• Manufacturing revenues (nominal) are up by 8.3 percent in 2004.
• Manufacturing revenues (nominal) will be up by 7.8 percent in 2005.
• Major concerns to manufacturers: prices and inflation; energy price increases; weak economy; effects of war and geopolitical concerns; and labor, benefits and healthcare costs, including labor shortages
• Overall attitude of manufacturing management — optimistic, not as strong as December 2003, but still very upbeat.

Non-Manufacturing

• Operating rate is currently 88.2 percent of normal capacity.
• Capital expenditures increased 4.5 percent in 2004.
• Capital expenditures will increase 1.8 percent in 2005.
• Production and provision capacity will increase 4.4 percent in 2005.
• Prices paid increased 4.8 percent during 2004.
• Prices paid will increase 3.6 percent during 2005.
• Labor and benefit costs will increase at a 3.7 percentage rate during 2005.
• Non-manufacturing employment will rise by 3.1 percent during 2005.
• Expect strong export growth by non-manufacturing exporters in 2005.
• Expect strong import growth by non-manufacturing importers in 2005.
• Non-manufacturing revenues (nominal) rose 6.4 percent in 2004.
• Non-manufacturing revenues (nominal) will rise 5.9 percent in 2005.
• Major concerns: energy price increases; prices and inflation; labor, benefits and healthcare costs, including labor shortages; weak economy; and effects of war and geopolitical concerns.
• Non-manufacturing purchasers are strongly optimistic, slightly more so than they were in April 2004 and significantly more so than in December 2003.

*Miscellaneous items include: a preponderance of jewelry, toys, sporting goods, and musical instruments.

**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.

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 top government agencies and economic business leaders. The report, compiled from responses to questions asked of more than 350 purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies, customers' inventories 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 from 17 different non-manufacturing industries 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. A weighted composite index similar to the PMI is not available at this time for this report.

The Manufacturing and Non-Manufacturing ISM Reports On Business® are published monthly by the Institute for Supply Management™. As the oldest and largest supply management institute in the world, the mission of the Institute for Supply Management™ (ISM) is to lead supply management. By executing and extending its mission through education, research, standards of excellence, influence building and information dissemination — including the renowned monthly ISM Report On Business® report — ISM continues to extend the global impact of supply management. ISM's membership base includes more than 43,000 supply management professionals in 75 countries. Supply management professionals are responsible for trillions of dollars in the purchases of products and services annually. ISM is a member of the International Federation of Purchasing and Supply Management (IFPSM).

The full text version of the reports is posted on ISM's Home Page at www.ism.ws on the first and third business day of every month after 10:10 a.m. (ET).

The next Manufacturing ISM Report On Business® featuring the December 2004 data will be released at 10:00 a.m. (ET) on Monday, January 3, 2005.

The next Non-Manufacturing ISM Report On Business® featuring the December 2004 data will be released at 10:00 a.m. (ET) on Wednesday, January 5, 2005.

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