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Economy in Brief

ISM Manufacturing Index Fell From January High
by Tom Moeller March 1, 2010

The rate of factory sector improvement eased slightly last month, according to the Institute for Supply Management. Perhaps due to cold weather, the February composite index slipped to 56.5 from January's 58.4. The latest remained the second highest reading of the economic recovery. It was up from the low of 32.9 reached in December '08. The latest figure fell short of Consensus expectations for a reading of 57.8. (Any figure above the break-even point of 50 suggests rising activity.) The ISM data is available in Haver's USECON database.

Declines in the production and new orders components accounted for the decline in the composite index. 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. Finally, the export order index fell to 56.5 and reversed half of its January increase. It still was up, however, from the low of 35.5 in December '08. 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.

To the upside was the employment index with a gain to 56.1, the highest level since 2005. It's up from a low reading of 25.9 last February. Twenty-two percent of firms indicated a higher level of payrolls versus 6% last February. Ten percent showed a lower level versus 54% last February. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The rise in the inventory component to 47.3 brought it back to the October high. Nineteen percent of respondents reported lower inventories versus 43 percent last February. Seventeen percent (NSA) of respondents indicated that they were raising inventory levels versus 19% last February. During the strong 2005 inventory accumulation 26% of firms indicated that they were raising inventories. The vendor performance indicator, which measures the speed of deliveries, rose and indicated the slowest speed since 2005.

The separate index of prices paid fell from its cycle-high to 67.0. That still was up from the December '08 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. Thirty-nine  percent of respondents reported higher prices while only 5 percent indicated lower prices.

The ISM data are available in Haver's USECON database. 

ISM Mfg February January December Feb. '09 2009 2008 2007
Composite Index 56.5 58.4 54.9 35.7 46.2 45.5 51.1
  New Orders 59.5 65.9 64.8 33.9 51.6 42.1 54.3
  Employment 56.1 53.3 50.2 25.9 40.5 43.3 50.5
  Production 58.4 66.2 59.7 35.6 50.4 45.2 54.1
  Supplier Deliveries 61.1 60.1 56.8 46.6 51.4 51.6 51.2
  Inventories 47.3 46.5 43.0 36.7 37.1 45.5 45.4
Prices Paid Index (NSA) 67.0 70.0 61.5 29.0 48.3 66.5 64.6
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