National Association of
Purchasing Management - Houston, Inc.
PO Box 771203 - Houston, Texas 77215 -1203

NAPM - HOUSTON BUSINESS REPORT

January 10, 2002 ....................................... by Douglas R. Miller, C.P.M ......................................... 713-988-7306

Copyright 2002 by NAPM-Houston, Inc. All Rights Reserved

ECONOMY BOTTOMING?

PRODUCTION DOWN SHARPLY

PRICES SOFTER

The Houston PMI (Purchasing Managers Index) dropped to 46.1 in December, marking the sixth consecutive month
of weakening in the Houston economy and the third consecutive month that the PMI has indicated overall economic
contraction. The fall from November’s 48.1 was considerable, however, the indices behind the PMI give a picture
that might be indicating the local economy is at or near thebottom of the current slide – six of the eight components
of the PMI showed little or no softening from November to December,implying that we may be seeing a leveling off.
January’s figures should add clarity to this picture.

Production was the component that most influenced December’s PMI drop. The Production index moved from +4 in
November to –14 in December (the same index as in October) with twenty-seven percent of survey contributors
reporting falling Production rates in their firms over the last thirty days.

Sales were reported at nearly the same rate of contraction as in November, marking three months of decline after 31
months of Sales rate growth.

Purchases fell noticeably with fewer Sales to support and lower Production rates to sustain.

Employment held firm in December, and while in negative territory for the third consecutive month, still seventy
percent of survey respondents saw no change in employment numbers in their organizations in December, while
25% witnessed overall manpower reductions.

There is virtually no evidence of inflationary pressure for the month with 98% of Houston’s supply chain
professionals reporting lower overall prices or no change in prices for the past month.

Inventories, both Purchased and Finished Goods were reduced in December as they have been in all but four
months since mid 1998.

With mixed reports about the national economy and when it will rebound (it may be on the edge of improvement
right now) and with recent OPEC moves taking effect Houston could be improving earlier than previously suggested
in this report, but we need more evidence.

Is this month’s survey just a hiccup in the numbers or are we seeing a pattern develop?

Items in short supply: Woven fiber, healthcare contract specialists, hydraulic valves, electrical parts, quality machined parts, hydraulic power unites,
electric winches, valve products, large OD OCTG, electronic cables, nickel alloys, rail service.

Prices on the UP side: Castings, vaccines, overseas freight, manufacturing tooling (drills, taps, end mills, etc.) aluminum sand castings, insurance rates,
electrical components, stampings, valves in small quantities, nickel alloys, PP, phenolic.

Prices on the DOWN side: Poly, stainless steel, fuel, MRO supplies, lumber/crating material, petroleum products, paper products, poly roll stock, bags,
stretch and shrink film, carbon steel flat rolled products, valve products, used tubing and casing, vinyl resin (3-4%), corrugated boxes, freight rates, rental
tools, PC’s, paint, glass products, nylon.

COMMENTS FROM SURVEY PARTICIPANTS

"We’re seeing some hungry suppliers offering reduced prices to build volume and fill their shops."

"Our business (EPC heavy industrial) continues to look good for 2002."

"Anticipating things slowing in first quarter."

"We have reached a plateau on new hires."

"After a two month drop, sales may be ready to start back up."

"We are busy and will continue to be very busy through March. Not sure what the future holds beyond that. "

"Number of international patients is starting to pick up. Still not pre 9/11 levels but they are on the rise. Overall census is very high."

"Typical oil patch year-end softening on the sales side but production side still going strong at year-end."

"Keeping the pace. Lead times have dropped tremendously for electronics and electrical/mechanical."

"Building more low end products which creates more work for less profit."

"Bar and tube producers have had drastic cut-backs resulting in longer lead times for raw materials in a down market."

"New sales orders slow, but showing signs things might improve soon."

"Lay-offs; back log continues down."

"Sales are down, and we are downsizing our inventory. Workforce reductions will be next."

"Business has slowed, yet there is work out there for those prepared to go after it. Some supplier inventories are low due to year-end and the economy. We will use this time to prepare for a strong first quarter."

"Will stay slow through December. Quoting heavy for after 1^st of year."

"The SLOW November has been replaced by a great December, with an excellent forecast for 1^st qtr. 2002."

"A whole lot of moving going on (one company to another)! This is a good time to be in purchasing."

"Established vendors are wanting to negotiate pricing upwards and new vendors willing to offer discounts."

"Increased law enforcement increasing our workload."

"Training to reduce corporate /govt. risk is becoming a procurement priority."

"Prices are about the same. There is supposed to be a 2% increase from some vendors in 1^st qtr. 2002."

"Price of well control insurance has moved upwards again this year."

"Business continues to be slower, however outlook for 1^st qtr. 2002 remains positive. A colder winter could improve oil and gas prices."

"Orders not coming as often as in last 2 years. Eating into backlog gradually.

"Prices are on the down side because people want business."

"Capital purchases are coming in for 2^nd qtr. Big reorganization in 2002."

"Though it has been a bad year, we have been able to keep our heads above water. Several large projects loom for the 1^st qtr. 2002."

"This is typically when we do plant maintenance and sales are seasonally low. Indications from Sales is 1^st qtr. will be back to normal. Still have pressure to maximize the inventory turns."

"Potential that imported welded pipe (S.S. and Alloys) will see an approximate increase of 20% over the next 3 – 6 months, depending on President Bush’s decision regarding the ITC Section 201 filing/investigation."

"We continue to receive RFP’s for new work within the U.S. from various owner/user organizations. This work could take place beginning in the 2nd/3^rd qtr. 2002. This level of RFP activity is highly unusual during this seasonal period as has been seen in past years.

"Indications are that commodities that have been declining in price over the last 6 months due to the economy’s contraction will be bottomed out by Q1’02, as manufacturers seek to re-establish margins."

DECEMBER Index 2001 (9 months)

(Note: Each monthly index was calculated by subtracting the "DOWN" percentage from the "UP" percentage. The indices are not seasonally adjusted.)

A reading above 50 indicates that the Houston economy is generally expanding; a reading below 50 indicates that it is generally contracting.