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Economy in Brief

ISM Factory Sector Index Improved Slightly, Again
by Tom Moeller July 1, 2008

The Composite Index of Manufacturing Sector Activity, from the Institute for Supply Management, rose very slightly last month to 50.2 from an unrevised May reading of 49.6. The latest level beat Consensus expectations for 48.6.

The index's average level of 49.3 during the first half of 2008 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 using all of the positive changes in activity added to one half of the zero change in activity measures.

Improvement in the inventory and in the supplier deliveries indexes accounted for about all of last month's improvement in the overall index. The production index did rise slightly to its highest level since January, but employment fell to the lowest level since 2003 and production fell slightly.

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 was roughly unchanged m/m at 49.6, though this year's figures are improved from last December's low.

The new export orders sub-series fell modestly m/m to 58.5 but so far this year has averaged 57.8, the best six months since mid-2004. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.

Prices paid rose further as the index rose to 91.5, its highest level since 1979 (no typo). During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.

ISM Mfg June May June '07 2007 2006 2005
Composite Index 50.2 49.6 53.4 51.1 53.1 54.4
  New Orders Index 49.6 49.7 58.5 54.3 55.4 57.4
  Employment Index 43.7 45.5 50.8 50.5 51.7 53.6
Prices Paid Index (NSA) 91.5 87.0 68.0 64.6 65.0 66.4
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