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Economy in Brief

ISM Manufacturing Index Edges Lower During January as Prices Strengthen
by Tom Moeller  February 1, 2021

• Factory activity slips m/m but remains strong y/y.

• New orders & production weaken.

• Pricing power improves further.

Activity in the factory sector weakened slightly last month. The Institute for Supply Management (ISM) reported that its Composite Index of Manufacturing Sector Activity edged lower to 58.7 during January after surging to a roughly three-year high of 60.5 in December, revised from 60.7. A reading of 60.0 had been expected in the Action Economics Forecast Survey. It was the eighth consecutive month above the break-even level of 50. During the last 15 years, there has been a 42% correlation between the composite index and the quarterly change in real GDP. Before the recession began, there had been a 67% correlation.

The ISM indicated, "The manufacturing economy continued its recovery in January. Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are continuing to cause strains that limit manufacturing growth potential."

The new orders index fell sharply to 61.1, a four-month low. A lessened 37% (NSA) of survey respondents reported stronger new orders and a reduced 12% reported a decline. The production index declined to 60.7, a six-month low. A greatly lessened 31% (NSA) of respondents reported higher production and a somewhat lessened 11% reported a decline. The inventories index eased to 50.8, but still indicated a fourth consecutive month of inventory accumulation.

To the upside last month, the employment measure rose to 52.6, the highest level since June 2019. It was increased from April's recession low of 28.2. A slightly lessened 14% (NSA) of respondents reported higher payrolls but a greatly lessened 14% reported a decline. Also increasing was the supplier delivery measure to 68.2, indicating the slowest product delivery speeds in nine months.

Pricing power continued to strengthen. The prices paid index surged to 82.1 (NSA), up significantly from last April's low of 35.3. It was the highest level since April 2011. A strengthened 62% of respondents reported higher prices compared to April's low of 10%. No respondents reported price declines, down from 39% in April.

Other series in the ISM report indicated mixed performance. The new export order measure fell m/m to 54.9, but remained up from the April 2020 low of 35.3. The import series improved to 56.8, a three-month high. It was above the break-even point of 50 for the seventh consecutive month. The order backlog measure increased to the highest level since June 2018 and remained greatly improved from the April low.

The ISM figures are based on responses from over 400 manufacturing purchasing executives from 20 industries, which correspond to their contribution to GDP in 50 states. These data 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) Jan Dec Nov Jan'20 2020 2019 2018
Composite Index 58.7 60.5 57.7 51.1 52.5 51.2 58.9
 New Orders 61.1 67.5 65.7 51.8 54.0 51.2 61.6
 Production 60.7 64.7 62.2 54.8 53.8 51.3 60.8
 Employment 52.6 51.7 48.3 46.8 44.3 50.9 56.9
 Supplier Deliveries 68.2 67.7 61.7 53.0 61.6 52.9 62.0
 Inventories 50.8 51.0 50.8 48.9 48.8 49.9 52.9
Prices Paid Index (NSA) 82.1 77.6 65.4 53.3 54.0 49.1 71.7
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