ISM Index Below 50

The Institute of Supply Management (ISM) reported that its Composite Index of Manufacturing Sector Activity fell in December to 47.7 from 50.8 in November. The decline contrasted with Consensus expectations for a slight m/m uptick to 51.0. Data points above 50 indicate growth in factory sector activity.

Last month's reading was the lowest since early 2003 and it was the first month below 50 since early last year.

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.

Sharp declines in the new orders and in the production components accounted for most of the decline in the composite index. The inventories index fell, but just slightly and the vendor deliveries index rose.

The index of new export orders fell out of bed with a six point m/m decline to its lowest level since last January. The index still, however, suggests that exports grew last month. The import index also remained low but nudged higher after great weakness last Fall. The index suggests declines in imports for the last three months.

The employment index recovered just slightly after a huge decline in November. That was its lowest level since 2003. 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 prices paid index again nudged higher to its highest level in six months. 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.