The ISM Reports on Business

2

Norbert Ore, C.P.M., CPSM

Chair, Business Survey Committee

Institute for Supply Management

“Adding Uncertainty to an Environment of Uncertainty”

Capitalism is the Worst System

− Except for All of the Rest

•The financial system is broken.•Banks aren’t lending.•Housing supply exceeds housing demand.•The Federal Reserve has no tools left.•Consumers are tapped out.•The unemployment rate is soaring.

How are things in the Economy??

It has happened before!!??

5

Composition of GDP

Governmentspending - 19%

CapitalSpending -16%

ConsumerSpending -70%

Other - 5%

6

Composition of Consumer Spending (PCE*)

* Personal Consumption Expenditures

Durable Goods- 12%

Nondurablegoods - 29%

Services - 59%

7

The Reports on Business

• A series of diffusion indexes measuring

change from month to month

• Above 50% indicates growth

• Below 50% indicates contraction

• 50% is the breakeven or “no change”

8

Economics and Calculus

The Rate of UP is DOWN

50 %

The Rate of DOWN is UP

50 %

ISM Manufacturing PMI 1990-2009

30

35

40

45

50

55

60

65

70

75

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Mfg Recession

August 2000-Jan 200218 month manufacturing recession

Cycle PeakMay 2004

61.4

2009 Avg

-15.0

-10.0

-5.0

0.0

5.0

10.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PMI Annual Avg - 1990-2008

11

45.2

34.9

12

http.www.ism.ws

The ISM Report on Business®

13

Manufacturing

Index Weight

New Orders .20

Production .20

Employment .20

Supplier Deliveries .20

Inventories .20

Non-Manufacturing

Index Weight

New Orders .25

Business Activity .25

Employment .25

Supplier Deliveries .25

ISM Composite Indexes

http://www.ism.ws

14

Manufacturing PMI - 35.6Non-manufacturing NMI - 42.9

30

35

40

45

50

55

60

65

70

75

PMI NMI

15

Manufacturing New Orders Index: 33.2

20

30

40

50

60

70

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

New Orders 3 Month Moving Avg

16

Manufacturing Production Index: 32.1

20

30

40

50

60

70

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Production 3 Month Moving Avg

17

Manufacturing Employment

Index: 29.9

25

30

35

40

45

50

55

60

65

70

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Employment 3 Month Moving Avg

Manufacturing Payrolls

19

Manufacturing Inventories Index: 37.5

30

35

40

45

50

55

60

65

70

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Inventories 3 Month Moving Avg

20

Manufacturing Customer Inventories Index: 55.5

30

35

40

45

50

55

60

65

70

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Customer Inventories 3 Month Moving Avg

Too

Too High

`

21

Manufacturing Prices PaidIndex: 29.0

15

25

35

45

55

65

75

85

95

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Prices 3 Month Moving Avg

Peak at 88.0 April 2004

Global Demand for Commodities

Katrina 8/22/05Rita 9/21/05

Peak at 91.5June 08

Manufacturing New Export OrdersIndex: 37.5

30

35

40

45

50

55

60

65

70

75

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

New Export Orders 3 Month Moving Avg

Manufacturing Imports Index: 36.5

30

35

40

45

50

55

60

65

70

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Imports 3 Month Moving Avg

24

Manufacturing Inventory to Sales Ratio(New Orders - Inventories)

- 4.3

-20

-15

-10

-5

0

5

10

15

Inventories are currently outpacing New Orders

25

Manufacturing Supplier Deliveries vs Prices Paid

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

Jan-

01

Apr-0

1

Jul-0

1

Oct-01

Jan-

02

Apr-0

2

Jul-0

2

Oct-02

Jan-

03

Apr-0

3

Jul-0

3

Oct-03

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Supplier Deliveries Prices

Pricing Power is typically created by Slowing Supplier Deliveries

26

Manufacturing GrowthIndustries in recession• Petroleum and Coal Products• Electrical Equipment, Components• Chemicals• Primary Metals• Machinery• Paper Products• Computer and Electronic Products• Food, Beverage• Transportation Equipment• Plastic and Rubber Products• Fabricated Metal Products

Industries in depression• Nonmetallic Mineral Products• Printing• Textiles • Wood Products• Furniture• Miscellaneous Mfg• Apparel

It has happened before!!??

28

• 1987 stock market crash• S&L crisis (1980s-1990s)• Rapid decline of oil prices in the 1980s (think Texas)• Asian Contagion - 1997• Long-Term-Capital Management - 2000 • September 11, 2001 • Enron downfall – 2002 credit crisis• Rapid rise of oil prices in the 2000s • Hurricanes Katrina and Rita – 2005

• Hurricane Ike – 2008

• Since 1982, the US economy has been in recession just 5.2% of the time,

versus 31% of the time between 1969 and 1982. • “The Panic and Recession of 2008” will result in a lengthier than normal

recession with the low point being Q42008-Q12009.• Rapid decline of oil prices in 2008 (think Texas)

Economics Events ………

Spending Money Spend your money on yourself•Seek greatest value•Careful, Maximize

Personal items

Somebody else’s money on you•Careful•Not the cheapest

Expense Account Lunch

Spend your money on somebody else•Careful, considered•Devote less detail

Gift

Somebody else’s money on somebody else•Distributor of welfare•Generosity

School system

Reference: Milton Friedman