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Economy in Brief

ISM Factory Index Remains Near Highest Level Since Early-2007 Suggesting Positive Growth
by Tom Moeller October 1, 2009

The National Association of Purchasing Management data continued to indicate that the recession in U.S. factory sector activity is over. Though the September composite index slipped to 52.6 from 52.9 in August, it remained near the 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 but it fell short of Consensus expectations for a reading of 54.0. The ISM data is available in Haver's USECON database.

A sharp decline in the production component to a still firm 55.7 accounted for much of the latest decline. 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 new orders component fell just modestly. On the up side, the export order index at 55.0 was near the highest in over a year, suggesting that recessions abroad are winding down. 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 employment index also fell just slightly. Though the 46.2 reading continued to suggest a lower level of hiring, the index was near its highest level since last August and 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.

A reduced rate of inventory liquidation seems to be behind the factory sector's recent improvement. The inventory index jumped to 42.5 which was its highest level since last October. The speed of supplier deliveries also points toward improvement in activity. Slower delivery speeds are indicated by a rise in the index to its highest level since 2005 (no typo).

The separate index of prices paid also suggests improved factory sector activity. At 63.5, the reading was near 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 September August September '08 2008 2007 2006
Composite Index 52.6 52.9 43.4 45.5 51.1 53.1
  New Orders Index 60.8 64.9 39.2 42.1 54.3 55.4
  Employment Index 46.2 46.4 40.9 43.2 50.5 51.7
Prices Paid Index (NSA) 63.5 65.0 53.5 66.5 64.6 65.0
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