ISM Factory Sector Index Reaches Its Highest Level In Nearly One Year

Though overall activity declined again last month, the recession in the factory sector continued to moderate, according to The National Association of Purchasing Management. Its July composite index rose to 48.9 from an unrevised June reading of 44.8 and reached it's highest level since August of last year. The August figure was up from the low of 32.9 hit last December. (Any reading below the break-even point of 50 suggests declining activity.) The July figure about matched Consensus expectations. The ISM data is available in Haver's USECON database.

Improvement in the components of the overall June ISM index again was broad-based. The production component surged to 57.9, up from the low of 26.3 in December, and was at its highest since June of 2007. 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.· The new orders figure also jumped sharply to the highest level in nearly two years. At 55.3 it was up from the December low of 23.1. Suggesting some stabilization in the recessions abroad was a modest rise in the export order index to 50.5 versus the December low of 35.5. 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 improvement also was indicated by a rise in the employment index. The jump to 45.6 was to its highest level since last August and that was up from the February low of 26.1. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The rate of inventory destocking picked finally may have stabilized as indicated by a modest rise in the inventory index to 33.5. It still was near the lowest level since 1982. That improvement brought with it another decline in the speed of supplier deliveries. At 52.0, the vendor performance index rose for the fourth consecutive month to its highest level in one year.

The separate index of prices paid again rose with improved factory sector activity levels. At 55.0, the reading above the break-even level of 50 was its highest since last August and it's 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.

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