The National Association of Purchasing Management Houston Inc.,

The Houston economy made a significant move into growth territory in May, as the Purchasing Managers Index (PMI) rose to 51.1 from the 46.3 recorded in April. After seven months of numbers below the break-even point, the Houston PMI rode into a plus mode primarily on the back of greatly improved Sales and Production numbers for the month.

The Sales component of the PMI (there are eight components; see below), after posting a -22 in April, bounced straight up and was reported at +5 in May. This was the highest Sales index reported since September 2001 and seems to imply that there are better times ahead in terms of Sales backlogs. As a cautionary note, however, there still appears to be uncertainty about both direction and motivation for the Sales index over the short term.

Production also improved in May, according to Houston's supply chain executives, with the Production index going from -22 to -2 over the past thirty days. Production has been reported as erratic since the fall of 2001, but has been slightly to significantly below break-even in six of the last eight monthly reports.

Employment varied only slightly from April to May with 22% of survey respondents reporting a decrease in jobs as opposed to 9% with increases. As has been reflected for several months, two-thirds of the firms represented in the survey reported no change in the number of employees in the current period.

Purchases were reduced in May for the 9th consecutive month but at less than half the rate of reduction reported a month earlier. One quarter of survey contributors increased their level of buying of goods and services in May while a third pared their purchasing commitments.

The majority of survey participants generally reduced Purchased Materials and Finished Goods Inventory for the 46th consecutive month. Clearly, a basic change of philosophy is developing in inventory management.

Sales and Production are now the prime movers in the turn-around of the PMI. With prices continuing virtually flat, will Employment and Purchases be stimulated to follow the Sales and Production numbers up the ladder? Probably so, but with a few potholes and pauses along the way.

Items in short supply: Castings, ethylene, custom plastic extrusions, computer peripherals, vaccines, steel, electronic parts, ERW pipe, bearings and races, hydraulic winches, winch parts.

Prices on the UP side: Chemical/petroleum based products, drilling rigs, insurance, smart control instruments, freight, steel, raw plastics, tubing, vaccines, travel management services, polymer resins (6%), steel, PVC, PP (polypropylene), ERW pipe, small tubing, steel plate, SS pipe, steel flanges, structural steel, tubing, bearings, specialty seals, electrical components, CS components.

Prices on the DOWN side: High alloy stainless components, worm gears/shafts, machine parts, paper goods, MRO items, cartons, PCBA's, IT equipment, travel, injection molding, tooling, ocean freight, paper, paper products, computer components, resin.

COMMENTS FROM SURVEY PARTICIPANTS

"We are once again working short-handed."

"Oilfield consumption of tubular products is increasing; however, there is at least a 90 day supply on the ground. September is starting to look good."

"All short term leases impacting budget as vendors are demanding increases to long-held pricing of last 5 years."

"Small increase in sales, Yeah! Keeping the pace."

"Freight (rate increases) due to insurance prices going up. Steel (price increases) due to foreign market."

"Priority hard to define. Too many chiefs wanting their needs 1st and too few Indians to complete the task."

"Employment down. We are surplusing in some departments in our company."

"Have seen some sign of increase. Marketing says we have seen bottom."

"Post expansion. We are now in a cost savings mode!"

"Business activity will pick-up after the annual Golf & BBQ."

"We are closely monitoring all costs to insure we remain profitable. Future projects are in planning stages, but look promising."

"Margins are smaller and everyone is wanting more with less to work with."

"Labor negotiations in some key transportation and freight industries are a concern."

"Raw material prices remain steady. Tax on import steel not affecting price so far."

"Power business sector declining. Backlog in upstream and downstream oil & gas still good."

"Incoming orders have really picked up in the last 3 - 4 weeks, but not getting too excited yet."

"Business is starting to slowly pickup-still nothing to talk about. Aircraft orders starting to show-up."

"Business continues to be under forecast and budget. March is low due to the uncertainty."

"Business is steady although not as good as last year, obviously. Work is out there for those willing to go get it."

"We continue to wait for the turn around in the "Oil Patch". No more overtime until things improve. Lots of promises - no firm orders."

"New twist - management has just given a "green light" to conservatively build inventory to support our effort in e-commerce, business to business transactions."

"New orders for quick turnaround shipments, primarily coming from the drilling sector, still not coming in as in past. Hard to define and predict what is going on. However, we are hiring technical people to deal with a few lucrative long lead projects."

"We have initiated price increases with our customers."

"Softening is working its way through the supply chain. Foundries & machine shops are getting "hungry" as backlogs drop."

"For our product we will maintain and possibly build production levels because of new projects in offshore drilling."

"Expecting moderate price increases on diesel engines in 4Qtr due to Oct 1 effectivity date on stricter EPA emissions standards."

"Holding our own."

(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.

	NAPM - HOUSTON BUSINESS REPORT
June 10, 2002	by Douglas R. Miller, C.P.M.	713-988-7306
	Copyright 2002 by NAPM-Houston, Inc. All Rights Reserved