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Economy in Brief

ISM Factory Index Rises Further Continuing Respectable Rebound
by Tom Moeller November 2, 2009

The recession in U.S. factory sector activity is over, according to the data from the National Association of Purchasing Management. Their composite index for October rose to 55.7 which was its highest level since April 2006. (Any reading above the break-even point of 50 suggests rising activity.) The latest figure exceeded Consensus expectations for a little-changed reading of 53.0 and was up from the low of 32.9 reached last December. The ISM data is available in Haver's USECON database.

While just above the break-even level of 50, the factory-sector growth suggested by the ISM index is in line with recoveries accompanying past upturns after severe recessions. To mirror the strength of those recoveries, however, the index still needs to rise to a level near or above the level of 60.

A sharp increase in the production component to a 63.3 led the latest increase. 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. Also rising was the inventories index to 46.9 which was its highest level since June of last year. Compared to the low of 32.2 reached earlier this year, the latest figure suggests that the correction of factory-sector inventory levels is about over.

Also to the upside, the employment index improved to 53.1 and indicated growth in factory-sector payrolls for the first month since July of last year. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The new orders index slipped m/m to a still-strong reading of 58.5, though it was shy of its recent high. Also to the downside was the speed of supplier deliveries index which slipped and erased the gains of the prior two months. Suggesting moderation in the economic downturns abroad, the export order index rose to 55.5 which was the highest level since August of last year. 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 separate index of prices paid continued to indicate improved factory sector activity with a rise to 65.0. That recovered the September decline and was 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.

The Yield Curve, October 2009 from the Federal Reserve Bank of Cleveland can be found here.

ISM Mfg October September August October '08 2008 2007 2006
Composite Index 55.7 52.6 52.9 38.7 45.5 51.1 53.1
  New Orders Index 58.5 60.8 64.9 32.4 42.1 54.3 55.4
  Employment Index 53.1 46.2 46.4 34.2 43.2 50.5 51.7
Prices Paid Index (NSA) 65.0 63.5 65.0 37.0 66.5 64.6 65.0
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