ISM Manufacturing Series Show Broad-Based Gains

Improvement in the U.S. factory sector continued last month from its nadir reached twelve months earlier. The National Association of Purchasing Management reported that its December composite index showed unexpected strength with a rise to 55.9 from 53.6 during November. The latest figure was the highest since April 2006 and it was up from the low of 32.9 reached last December. A more modest gain to 54.0 had been the Consensus expectation. (Any reading above the break-even point of 50 suggests rising activity.) The ISM data is available in Haver's USECON database.

The positive factory-sector growth rate suggested by the ISM index is in line with recoveries accompanying past upturns from severe recessions. To mirror the strength of those recoveries, however, the index still needs to rise to a level near or above the level of 60.

The new orders index showed the greatest m/m gain with its increase to a high of 65.5 from 60.3 in November. Working the other way, the export order index fell moderately to 54.5 from its recent high. Nevertheless the index was up from its low of 35.5 last December. 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.

The employment index showed a smaller gain 52.0. Nevertheless, the level indicated positive growth in factory-sector payrolls. It has increased from a low reading of 26.1 last February. Seventeen percent of respondents indicated higher payrolls versus only seven percent last December. Eighteen percent indicated a lower level of hiring versus fifty percent last December. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The production component rose modestly to 61.8 but remained lower than its October high of 63.3. 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.

A two point gain in the inventory component to 43.4 recovered some of its November decline but it still was down from the October high. Thirteen percent (NSA) of respondents indicated that they were raising inventory levels versus 18% last December. During the strong 2005 inventory accumulation 26% of firms indicated that they were raising inventories. Thirty percent of respondents indicated lower inventories.

The separate index of prices paid made up more than half of its November decline and was 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.

The ISM data are available in Haver's USECON database.

Monetary Policy and the Housing Bubble is the title of yesterday's speech by Fed Chairman Ben S. Bernanke and it is available here.