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Economy in Brief

ISM Index Factory Sector Falls Below 50: Indicates Contraction
by Tom Moeller March 3, 2008

For the second month in the last three, the Institute of Supply Management (ISM) reported that its Composite Index of Manufacturing Sector Activity was below the breakeven level of 50. The m/m decline to 48.3 was right in line with Consensus expectations for a drop to 48.4. Data points above 50 indicate growth in factory sector activity.

Last month's composite reading was down from 50.7 in January and 48.4 in December. The three month average level of 49.1 was its lowest since early 2003.

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.

Sharp declines in each of the five component series, excepting new orders, contributed to last month's decline in the composite index. Production fell 4.5 points and reversed most of its January recovery. The inventory component fell 3.7 points and reversed all of its January rise while the vendor deliveries component fell 2.7 points to the lowest level since 2003.

The employment index fell a sharp 1.1 points, repeating most of the January decline, to the 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 new orders index fell a more moderate 0.4 points although domestic orders may have held up. The index of new export orders fell a sharp 2.5 points to 56.0, back to the average level during 4Q07 and 3Q07.

The prices paid index continued firm. A modest 0.5 point downtick during February followed very strong gains in three of the prior four months. That left the index at its highest level since August 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.

The Benefits of Systematic Monetary Policy is today's speech by Philadelphia Fed President Charles I. Plosser and it can be found here.

ISM Mfg February January February '07 2007 2006 2005
Composite Index 48.3 50.7 51.5 51.1 53.1 54.4
  New Orders Index 49.1 49.5 55.4 54.3 53.4 57.4
  Employment Index 46.0 47.1 50.9 50.5 51.7 53.6
Prices Paid Index (NSA) 75.5 76.0 59.0 64.6 65.0 66.4
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