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Economy in Brief

ISM Index Near "No Growth" Level
by Tom Moeller November 1, 2007

The Composite Index of activity in the manufacturing sector, reported by the Institute of Supply Management (ISM), fell to 50.9 last month from 52.0 during September. A reading above 50 indicates growth in factory sector activity. Consensus expectations had been for a reading of 51.6.

Last month's PMI figure was the lowest since January when industrial production in the factory sector fell 0.6%. The three month % change in factory sector output fell to 0.4% last month

During the last twenty years there has been a 64% correlation between the level of the Composite Index and the three month growth in factory sector industrial production.

It is appropriate to correlate the ISM index level with factory sector growth because the ISM index is a diffusion index. It measures growth by being constructed using all of the absolute positive changes in activity added to one half of the no change in activity measures.

Declines in three of the index's five components accounted for the lower composite index, notable was the decline in the production component. The inventories component rose sharply to its highest level since July and employment also rose.

The modest 0.3 point rise in the employment index to 52.0 followed a 0.4 point September rise. During the last twenty years there has been a 67% correlation between the level of the ISM employment Index and the three month growth in factory sector employment.

The index of new export orders recovered all of its September decline with a 2.5 point rise to 57.0. The import index conversely fell to 47.5, the lowest level since 2001 and suggestive that imports declined last month.

The prices index moved much higher with the rise in oil prices. During the last twenty years there has been a 77% correlation between the price index and the three month change in the PPI for intermediate goods.

October September October'06 2006 2005 2004
Composite Index 50.9 52.0 51.5 53.9 55.5 60.5
  New Orders Index 52.5 53.4 52.1 55.4 57.4 63.5
Prices Paid Index (NSA) 63.0 59.0 47.0 65.0 66.4 79.8
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