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Economy in Brief

ISM Index Improved
by Tom Moeller February 1, 2008

The Institute of Supply Management (ISM) reported that its Composite Index of Manufacturing Sector Activity recovered last month. The m/m gain to 50.7 from a revised 48.4 in December (figures were revised back to 2005) contrasted with Consensus expectations for a slip to 47.5. Data points above 50 indicate growth in factory sector activity.

Last month's composite reading was the highest since August of last year.

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.

Strong gains in the production and in the inventory components accounted for most of the rise in the composite index. The orders and the vendor deliveries components also rose but to much lesser degrees.

The index of new export orders recovered all of the m/m decline during December. The latest was the highest level since last May.

The employment index declined sharply m/m to its lowest level since 2003. 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 prices paid index jumped sharply m/m to its highest level since July 2006. 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.

  January December January '07 2007 2006 2005
Composite Index 50.7 48.4 49.3 51.1 53.1 54.4
  New Orders Index 49.5 46.9 52.4 54.3 53.4 57.4
Prices Paid Index (NSA) 76.0 68.0 53.0 64.6 65.0 66.4
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