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Economy in Brief

ISM Factory Sector Index Eases, Prices Slower Too
by Carol stone, CBE  October 1, 2018

The ISM composite index of activity in the factory sector decreased to 59.8 in September from 61.3 in August. A reading of 60.1 was expected in the Action Economics Forecast Survey. During the last ten years, there has been a 74% correlation between the index level and q/q growth in real GDP.

The September decline in the overall index resulted mainly from a slowdown in the growth of new orders to 61.8 from 65.1 in August. The supplier deliveries index also declined, marking 61.1 following 64.5; this means deliveries were faster because activity was less rigorous. Inventories also eased, dipping back to 53.3 from 55.4.

On the other hand, production did improve a bit, to 63.9 in September from 63.3 in August, and again set a high since January's 64.5. The improvement was indirect, as fewer companies reported lower production, thus adding to the net result. The employment component was also positive, edging up to 58.8 from 58.5; that gain was actually seasonal, as the survey responses before seasonal adjustment showed a small decrease in companies with higher employment and a modest rise in companies with lower employment. During the last ten years, there has been an 85% correlation between the level of the employment index and the m/m change in factory sector payrolls.

The prices paid index, which is not part of the overall index, fell again in September, reaching 66.9 from August's 72.1 (NSA). The September figure is the lowest level since August 2017. It includes a fall in the percentage of companies paying higher prices to 42.3%, the first count below 50% since January and the lowest since last December. The percentage facing falling prices increased to 8.6% from 6.8% in August.

Amongst the other ISM series which are not in the composite, order backlogs eased to 55.7 in September from 57.5 the month before. Export orders showed a small gain to 56.0 from 55.2 and import orders rose to 54.5 from 53.9. This held the import order series to the lower range of the previous couple of months after the second quarter's average of 57.0. Companies' lead-times for ordering production supplies remained relatively long, as they edged down to 68 days from August's 69 days, but these compare to averages of 61 days in 2016 and 2017. So there remains some extra lag in the acquisition of supplies, suggesting that activity is relatively strong.

The ISM figures are diffusion indexes where a reading above 50 indicates expansion. The figures from the Institute for Supply Management can be found in Haver's USECON database; further detail is found in the SURVEYS database. The expectations number is available in Haver's AS1REPNA database.

ISM Mfg (SA) Sep Aug Jul Sep'17 2017 2016 2015
Headline Index 59.8 61.3 58.1 60.2 57.4 51.4 51.3
 New Orders 61.8 65.1 60.2 64.4 62.2 54.5 52.3
 Production 63.9 63.3 58.5 61.9 61.0 53.8 59.3
 Employment 58.8 58.5 56.5 58.7 56.8 49.2 50.7
 Supplier Deliveries 61.1 64.5 62.1 63.4 56.8 51.8 50.8
 Inventories 53.3 55.4 53.3 52.6 50.4 47.5 49.4
Prices Paid Index (NSA) 66.9 72.1 73.2 71.5 65.0 53.1 40.1
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