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Economy in Brief

ISM Index Roughly About Stable M/M But Still Up From Recent Lows
by Tom Moeller August 1, 2008

The Institute for Supply Management 's Composite Index of Manufacturing Sector Activity fell very slightly month-to-month during July to a break-even 50 from 50.2 in June. Still, the index is up from the monthly lows near 48 this past winter. Consensus expectations had been for more of a decline to 49.1 in July.

Despite the very recent improvement, the index's average level so far this year of 49.4 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.

The employment index improved markedly last month to a level of 51.9. That was the first reading above the break-even level of 50 since October. 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, however, offset that rise with a decline to 45.0 which was its lowest level since the recession of 2001. The new export orders sub-series declined sharply to 54.0 which was its lowest reading since last December. 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.

The production index rose modestly to 52.9 but the inventories series fell sharply to 45.0.

Prices paid backed off a bit to a still high index level of 88.5. 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 July June July '07 2007 2006 2005
Composite Index 50.0 50.2 52.3 51.1 53.1 54.4
  New Orders Index 45.0 49.6 56.9 54.3 55.4 57.4
  Employment Index 51.9 43.7 50.3 50.5 51.7 53.6
Prices Paid Index (NSA) 88.5 91.5 65.0 64.6 65.0 66.4
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