The Factory Sector Recession IsOver; ISM Index Jumps To Highest Level Since Early-2007

According to The National Association of Purchasing Management data, the recession in U.S. factory sector activity is over. Its August composite index jumped to 52.9 from an unrevised July reading of 48.9 and reached it's highest level since June of 2007. (Any reading above the break-even point of 50 suggests rising activity.) The latest figure was up from the low of 32.9 hit last December and it greatly exceeded Consensus expectations for a reading of 50.5. The ISM data is available in Haver's USECON database.

Last month, improvement in the ISM index again was broad-based led by a 9.6 point surge in the new orders component. So great was the strengthening in orders that the latest index level of 64.9 was the highest since December of 2004. That compared to a low of 23.1 reached this past December and reflected increases in orders reported by 43% (NSA) of firms. Only 5% reported higher orders this past December. Adding to that strength in domestic orders, it appeared that recessions abroad also wound down. The export order index jumped to 55.5 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. Though still reflecting a drop in payrolls, the rate of decline has eased. The index rose to 46.4 which was 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 production component also strengthened. The rise to 61.9 was to its highest level since October 2005, up from the low of 26.3 in December. 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.

All this improvement in activity has brought with it a slowing in the speed of vendor deliveries. That's indicated by the gain in the delivery index to the highest level since 2006. The rate of inventory destocking also appears to have slowed. The inventory index increased modestly to 34.4 but it still was near the lowest level since 1982.

The separate index of prices paid again rose with improved factory sector activity. At 65.0 the reading above the break-even level of 50 was its highest level 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.

Earlier strength in gasoline prices took a breather during July and August. Nevertheless, prices remained up sharply since the year began. The pump price for regular gasoline dipped slightly last week to an average $2.61 per gallon, roughly where it's been since early June. Compared to the December low, however, prices remained up by one dollar (62%). Yesterday, that slight decline in pump prices was accompanied by a dip in the wholesale gasoline price to $1.84 per gallon. Prices had reached a high in early-August of $2.03. The figures are reported by the U.S. Department of Energy and can be found in Haver's WEEKLY & DAILY databases.

In contrast to the stability of gasoline prices, crude oil prices have strengthened. Light sweet crude oil prices (WTI) increased to $72.41 per barrel last week versus a June high of $70.61. Prices have more-than-doubled since the December low of $32.37. Most recently, the price strength eased. Yesterday the spot market price for light sweet crude oil fell to $69.96 per barrel. Prices had reached a daily high of $73.82 just last week.

Earlier strength in gasoline prices stood against the backdrop of a firming demand picture, which now has eased. Since early-June the demand for gasoline has dropped moderately and year-to year demand slipped by 3.5%. Demand for distillate also is off sharply (-19.8% y/y) and residual fuel oil demand has given back its earlier strength (-14.8% y/y). Finally, oil remains plentiful as evidenced by an 11.3% y/y rise in inventories of crude oil & petroleum products. Inventories of gasoline recently have dropped somewhat but they have strengthened by 6.5% versus last year, the strongest gain since early last year. The figures on crude oil production and inventories are available in Haver's OILWKLY database.

Natural gas prices make up the weakest part of the energy sector's pricing environment. Falling last week to an average of $2.72 per mmbtu (-66.5% y/y), prices were down by over three-quarters from the high reached in early-July of last year of $13.19/mmbtu.

Has Greater Globalization Made Forecasting Inflation More Difficult? from the Federal Reserve Bank of Dallas can be found here.

There's been no letup in the recovery in housing demand. The National Association of Realtors reported that during July pending, improved home affordability boosted sales of existing homes by 3.2% from June to their highest level since June of 2007. The gain followed a similar rise in June sales and doubled Consensus expectations for a 1.6% increase.

The gain in July home sales was led by a 12.1% m/m rise in sales in the West. That rise  was a multiple of the increases during the last several months and it lifted sales to the highest level since September of last year. The latest also was near the highest since early-2006. Sales in the South also rose a firm 3.1% to the highest level since mid-2007. Sales in the Midwest went the other way and fell 2.0%. They have been roughly flat since January. Finally, sales in the Northeast dropped 3.0% from June and were roughly unchanged since April.

These home sales figures are analogous to the new home sales data from the Commerce Department in that they measure existing home sales when the sales contract is signed, not at the time the sale is closed. The series dates back to 2001.

The pending home sales data are available in Haver's PREALTOR database. The number of homes on the market and prices are in the REALTOR database. 

Preliminary data show that German retail sales rose 0.7% in volume terms in July after declining in May and June. (Final data for total retail sales plus data on the composition of sales for the month of July will be available in about two weeks.) The value of retail sales rose only 0.1%, implying a decline in retail prices.  While the rise in retail sales is encouraging, its magnitude suggests a pretty lack luster consumer.   The first chart shows the volume, value and implied price level of Germany's retail sales.

Perhaps the reason that these data suggest such a lack luster consumer, is that they do not take into account the effect of the Government's program, paying people 2,500 Euros if they scrap their car and buy a new one, which began in January.  German retail sales data exclude sales of motor vehicles.   Combined wholesale and retail sales of cars and light trucks are available in the Manufacturing, Trade & Service Section of the Haver data base for Germany.  This series combining wholesale sales is not strictly comparable with the retail sales data and is available only through June. The increase in passenger car registrations is, perhaps, a better proxy for sales of new cars and this series, which is not seasonally adjusted, is available through July.  It, too, can be  found in the  Manufacturing, Trade & Services section in the Haver data base on Germany.  The year to year increases in these two series are shown in the second chart.  The  year to year increases in car registrations since January have been particularly striking and suggest that consumers have a higher propensity to spend than the retail sales data would suggest.