New orders and production for U.S. manufacturing are at record rates and buyers are confident that growth will continue, according to the 67th Semiannual Economic Forecast released by the Institute for Supply Management at its recent conference in Philadelphia.

"Manufacturing purchasing and supply executives are optimistic about their organizations' prospects for the balance of 2004," said Norbert J. Ore, chair of the ISM manufacturing business survey committee and group director, strategic sourcing and procurement at Georgia-Pacific Corp. "At present, the sector is in the midst of a solid recovery. Manufacturing is in its twelfth consecutive month of growth."

The data are based on a monthly survey of about 800 purchasing professionals who anonymously participate in the ISM report. Respondents report operating rates at 85.6% of their normal capacity, up from 80.1% in December 2003. Supply managers forecast they will boost capital expenditures in 2004 by 6%, up from 2.7% in 2003.

Mark Zandi, chief economist for Economy.com says there are three primary factors fueling the bullish report, the first of which is massive government stimulus through monetary and fiscal policy.

"Tax cutting has been massive and very supportive to the struggling economy," Zandi told a large crowd at the ISM meeting, which attracted some 1,300 purchasing and supply professionals. The current level of spending has been matched only twice since World War II, during the height of the Korean and Vietnam wars.

The second factor driving the recovery is the current inventory cycle. "The decline in inventory-to-sales ratios has been extraordinary," Zandi commented, adding that as the economy improves, manufacturers will continue to rebuild inventories. The ISM report indicated that buyers will continue to attack inventory levels, as they have consistently reported for 14 years.

A third factor is very robust productivity growth. Expenditures on information technology to boost productivity are at a record high, dramatically reducing labor in factory jobs as well as purchasing. Experts expect this trend to continue.

Another economist speaking at the conference backed up the IT investment point. "Computer and software spending now represents about 5.3% of gross domestic product and I think that will rise to the 10%-12% range in the next 10-plus years," said Brian Wesbury, chief economist for Chicago investment firm Griffin, Kubik, Stephens and Thompson. Wesbury says the software spending increase is paying huge dividends to the economy but is also triggering a major structural shift in employment comparable to the shift from a farm to an industrial economy in the 19th century.

ISM's widely followed Purchasing Managers Index stood at 62.5 in March, up 1.1 percentage points from the previous month. Any index above 50 indicates growth in the economy. ISM's backlog of orders index increased 1.5 percentage points to 63.5 in March.

"The first quarter was very strong for the manufacturing sector and the economy overall," said Ore. "Our survey respondents generally indicate that business is quite strong."

Several commodities were reported in short supply: several grades of steel and aluminum, electronic components and propylene, an important precursor to polypropylene. Only two commodities were listed down in price: caustic soda and natural gas.

The strength in the report was reflected at the exhibit hall at the ISM conference. Several technology companies reported substantial growth in volume for supply chain software products. "A year ago, a lot of buyers walked around kicking the tires," commented one tech company executive. "Now they're asking us how we can help solve specific problems." Virtually all vendors interviewed by Purchasing reported significant growth in year-to-year volume, citing growing confidence in the technology products and increasing drives to cut costs.

Vendors offering contract labor solutions reported particular success. "We see companies moving increasingly to contingent labor, not just because of volume swings, but also because they want to avoid high health care costs for permanent employees," commented John Martin, a vice president at IQ Navigator, a five-year-old firm with about 80 employees and 30 customers.

There has also been a surge in indirect spend outsourcing, driving revenues at companies such as ICG Commerce and Prosero. Officials at those companies told Purchasing that sourcing teams want to focus on core strategic buys and still reap significant savings in indirect categories, particularly if they had not previously received much purchasing attention.

Also evident at ISM was a continuing consolidation among technology suppliers. Ariba is muscling up with a merger with FreeMarkets. Tigris, a spend analysis provider, is now part of VerticalNet. SAP, well known for its ERP platforms, is now a big player in strategic sourcing and other supplier relationship management categories.

The ISM board of directors announced a major initiative in social responsibility and asked companies to sign a document indicating an intent to comply with the guidelines. "Historically, the ISM, formerly known as the National Association of Purchasing Management, was an educational organization," said Chairman Anthony Nieves in an interview with Purchasing. "Now we want to take the ISM to a different level and add value for supply management professionals."

The result is a set of seven principles that are designed to make sure that suppliers are in compliance with standards on environmental regulations and labor. Dick Conrad, the top procurement officer at Hewlett-Packard, told Purchasing that HP endorses the compact and has had similar principles in place for more than 20 years. They include goals to remove heavy metals, such as lead and cadmium, from products such as electronics and plastics that are used by HP. Conrad said suppliers are expected to have a road map to come into compliance with the rules and must also show plans on product recycling.

The requirements were rolled out to HP's top 50 suppliers, who account for about 80% of the company's spend. "We are trying to collaborate rather than just bang them over the head," said Conrad. Five suppliers declined to sign up and are under review, he said.