ISM Factory Sector Index Ticked Higher But Still Was Below 50

The Institute of Supply Management (ISM) reported that in March its Composite Index of Manufacturing Sector Activity ticked up to 48.6 from 48.3 in February. The rise exceeded Consensus expectations for a decline to 47.5. However, the index remained below the break even level for activity of 50 for the third month in the last four.

Last month's composite reading was down from 50.7 in January and 48.4 in December. The three month average level of 49.2 remained near its lowest since early 2003.

During the last twenty years there has been a 64% correlation between the level 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 growth because the ISM index is a diffusion index. It measures growth by being constructed using all of the absolute positive changes in activity added to one half of the no change in activity measures.

The employment index rose a sharp 3.2 points to 49.2 and made up all of the declines during the prior two months. During the last twenty years there has been a 67% correlation between the level of the ISM employment Index and the three month growth in factory sector employment. The supplier deliveries index also surged 3.5 points to its highest level since late 2006.

Three of the index's component series fell. The new orders index declined sharply to its lowest level since late in the recession year of 2001. Production also fell sharply to its lowest level since early 2003 and the inventory component slipped to its lowest level since last September.

The new export orders sub-series rose slightly by 0.5 points and recovered just a piece of a large 2.5 point February drop.

The prices paid index surged to its highest level since October 2005. During the last twenty years there has been a 77% correlation between the price index and the three month change in the PPI for intermediate goods.

The Economic Review 2008 from the Federal Reserve Bank of San Francisco is available here.

Chain store sales slipped another 0.2% last week, according to the International Council of Shopping Centers ICSC-UBS Chain Store survey. Together with the prior week's 0.4% slip, the two declines left sales in March essentially flat with the February average after 0.4% increase.

The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

The Bank of Japan's Tankan Survey released today shows growing concerns among large manufacturers and non manufacturers, as can be seen in the first and second charts. The excess of optimists over pessimists among large manufacturers appraising current conditions declined to 11% from 19% in December. A slightly smaller decline was registered for non manufacturers--12% from 16%. In looking to the second quarter, the excess of optimists over pessimists among large manufacturers dropped to 7%. For non manufacturers, the excess of optimists dropped to 13%. One of the factors influencing the manufacturers, in particular, has been the steep rise in the yen over the past nine months, can be seen in the third chart.

Among the most closely watched items in the Tankan survey are the forecasts of capital spending.In the current survey, manufacturers plan to increase capital spending in the current fiscal year ending last month, March, 2008 by 9.5% and non manufacturers by 5.2%. For next fiscal year ending March 2009, however, both large manufacturers and non manufacturers are planning to cut capital spending, the manufacturers by 3.3% and the non manufacturers by 0.6%, as can be seen in the fourth and fifth charts.

Much more detail from the Tankan can be found in the Haver Database, JAPAN. Data are available for medium and small enterprises and for specific industries as well as sales and profit expectations.

While German unemployment fell more than expected in March there has been no relief to German retailers or by association consumers. The growth rate series in the chart is remarkable for its tranquility. German real retail sales are simply flat after some turbulence early in 2007 stemming from the VAT tax that shifted sales into 2007 then sucked them out of 2008. Sales are settling down into a very narrow growth band in late 2007 and 2008. Even though Germany continues to post acceptable rates of growth, the consumer has long been forecast as a force to join in to extend the expansion but he simply has not. Indeed, real retail sales ex-auto sales (see table, at the bottom) fell sharply in February. Sales by this measure at the two-month mark in the new quarter are declining at a 1.3% annual rate. Real ex auto sales would have to rise by 1.6% in March to ‘elevate’ the quarter’s sales pace to zero.