The National Association of Purchasing Management indicated that the recession in factory sector continued to moderate last month. The June composite index for the factory sector rose to 44.8 from 42.8 in May. Though the latest figure still indicates a lower level of activity, as does any below the break-even point of 50, the rate of decline appears to be easing. The worst of the decline was at yearend '08 when the index touched 32.9. The latest figure about matched Consensus expectations.

Improvement in the components of the overall June ISM index was broad-based. The production component pushed through the break-even point for the first time since last summer with a rise to 52.5, up off the low of 26.3 in December. During the last ten years there has been an 84% correlation between the level of the production component 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 output 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 speed of supplier deliveries also slowed for the third consecutive month.

Importantly, the employment index rose to its highest level (40.7) since last September and it was up from the February low of 26.1. During the last ten years there has been an 89% correlation between the index level and the one-month change in manufacturing payrolls. The new orders figure retraced slightly its earlier improvement with a decline to slightly below the break-even level of 50. Nevertheless, it remained near the highest level since last August and up from the December low of 23.1. The export order index improved further to 49.5 versus the December reading of 35.5. 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 rate of inventory destocking picked up as evidenced by a low reading of 30.8 which was the lowest level since 1982.

The separate index of prices paid again rose sharply with improved activity levels. The reading at the break-even level of 50 was its highest since last September and it's up from the December low of 18.0. 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.