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Economy in Brief

ISM Factory Sector Index Ticked Higher But Still Was Below 50
by Tom Moeller April 1, 2008

The Institute of Supply Management (ISM) reported that in March its Composite Index of Manufacturing Sector Activity ticked up to 48.6 from 48.3 in February. The rise exceeded Consensus expectations for a decline to 47.5. However, the index remained below the break even level for activity of 50 for the third month in the last four.

Last month's composite reading was down from 50.7 in January and 48.4 in December. The three month average level of 49.2 remained near 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.

The employment index rose a sharp 3.2 points to 49.2 and made up all of the declines during the prior two months. 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 supplier deliveries index also surged 3.5 points to its highest level since late 2006.

Three of the index's component series fell. The new orders index declined sharply to its lowest level since late in the recession year of 2001. Production also fell sharply to its lowest level since early 2003 and the inventory component slipped to its lowest level since last September.

The new export orders sub-series rose slightly by 0.5 points and recovered just a piece of a large 2.5 point February drop.

The prices paid index surged to its highest level since October 2005. 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 Economic Review 2008 from the Federal Reserve Bank of San Francisco is available here.

ISM Mfg March February March '07 2007 2006 2005
Composite Index 48.6 48.3 50.7 51.1 53.1 54.4
  New Orders Index 46.5 49.1 51.5 54.3 55.4 57.4
  Employment Index 49.2 46.0 49.2 50.5 51.7 53.6
Prices Paid Index (NSA) 83.5 75.5 65.5 64.6 65.0 66.4
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