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Economy in Brief

ISM Manufacturing Index Is Boosted By Inventories
by Tom Moeller

According to the Institute for Supply Management, the level of activity in the factory sector grew last month at the fastest pace since July of 2004. The March composite index rose to 59.6 and made all of February's decline to 56.5. It was up from the low of 32.9 reached in December '08. The latest figure beat Consensus expectations for a reading of 57.0. (Any figure above the break-even point of 50 suggests rising activity.) The ISM data is available in Haver's USECON database.

The rise in the inventory component to 55.3 brought to the highest level since 1984. Fully 26 percent of respondents indicated that they were raising inventory levels versus 9 percent last March while just 13 percent indicated lower inventories versus 43 percent one year ago. Building inventories slowed the pace of supplier deliveries as indicated by the index's rise to 64.9 which was also was its highest level since 2004.

The new orders and production components also rose modestly m/m. 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 surged to 61.5 which was its highest since 1988. That was up 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.

Factory sector hiring did not participate as fully in last month's strength. Nevertheless, the index's slip to 55.1 still left it indicating positive employment growth. The reading is up from the low of 25.9 last February. Twenty-one percent of firms indicated a higher level of payrolls versus 8% last March. Ten percent showed a lower level versus 51% one year ago. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The separate index of prices paid rose to 75.0, a new high for this recovery. That was up from the December '08 low of 18.0. During the last twenty years there has been a 83% correlation between the price index and the three-month change in the PPI for intermediate goods. Fifty-three percent of respondents reported higher prices while only 3 percent indicated lower prices.

ISM Mfg March February January March '09 2009 2008 2007
Composite Index 59.6 56.5 58.4 36.4 46.2 45.5 51.1
  New Orders 61.5 59.5 65.9 41.2 51.6 42.1 54.3
  Employment 55.1 56.1 53.3 28.3 40.5 43.3 50.5
  Production 61.1 58.4 66.2 35.7 50.4 45.2 54.1
  Supplier Deliveries 64.9 61.1 60.1 44.4 51.4 51.6 51.2
  Inventories 55.3 47.3 46.5 32.3 37.1 45.5 45.4
Prices Paid Index (NSA) 75.0 67.0 70.0 31.0 48.3 66.5 64.6
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