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Economy in Brief

The Factory Sector Recession Is Over; ISM Index Jumps To Highest Level Since Early-2007
by Tom Moeller September 1, 2009

According to The National Association of Purchasing Management data, the recession in U.S. factory sector activity is over. Its August composite index jumped to 52.9 from an unrevised July reading of 48.9 and reached it's highest level since June of 2007. (Any reading above the break-even point of 50 suggests rising activity.) The latest figure was up from the low of 32.9 hit last December and it greatly exceeded Consensus expectations for a reading of 50.5. The ISM data is available in Haver's USECON database.

Last month, improvement in the ISM index again was broad-based led by a 9.6 point surge in the new orders component. So great was the strengthening in orders that the latest index level of 64.9 was the highest since December of 2004. That compared to a low of 23.1 reached this past December and reflected increases in orders reported by 43% (NSA) of firms. Only 5% reported higher orders this past December. Adding to that strength in domestic orders, it appeared that recessions abroad also wound down. The export order index jumped to 55.5 versus the December low 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.

Factory sector improvement also was indicated by a rise in the employment index. Though still reflecting a drop in payrolls, the rate of decline has eased. The index rose to 46.4 which was its highest level since last August and that was up from the February low of 26.1. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The production component also strengthened. The rise to 61.9 was to its highest level since October 2005, up from 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.

All this improvement in activity has brought with it a slowing in the speed of vendor deliveries. That's indicated by the gain in the delivery index to the highest level since 2006. The rate of inventory destocking also appears to have slowed. The inventory index increased modestly to 34.4 but it still was near the lowest level since 1982.

The separate index of prices paid again rose with improved factory sector activity. At 65.0 the reading above the break-even level of 50 was its highest level since last August 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.

ISM Mfg August July August '08 2008 2007 2006
Composite Index 52.9 48.9 49.3 45.5 51.1 53.1
  New Orders Index 64.9 55.3 48.2 42.1 54.3 55.4
  Employment Index 46.2 45.6 48.0 43.2 50.5 51.7
Prices Paid Index (NSA) 65.0 55.0 77.0 66.5 64.6 65.0
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