U.S. ISM Index Indicates Topping Of Factory Sector Growth

Rising trends don't have unending momentum. And the current rebound in factory sector activity appears to be no exception. The Institute for Supply Management indicated that their May composite index of factory sector activity slipped to 59.7 from 60.4 in April. While May's figure was higher than Consensus expectation's for a decline to 59.0, recent levels have been historically hard to sustain. Still, the latest figure is up from the low of 32.5 reached in December '08. (Any figure above the break-even point of 50 suggests rising activity.) The ISM data is available in Haver's USECON database.

A slower rate of inventory accumulation was the main source of the composite index's May weakness. The new orders, production and vendor performance components were roughly unchanged. Notable, however, was the slight gain in the employment index to 59.8. It was the highest level since early-2004. During the last ten years there has been an 89% correlation between the ISM employment index and the m/m change in factory sector payrolls.

Also showing lift was the separate index of export orders to 62.0 which was the highest level since 1988. During the last ten years there has been an 88% correlation between the level of the index and the quarterly change in merchandise exports. Twenty-eight percent of respondents reported higher export orders while fourteen reported lower orders.

The separate index of prices paid slipped to 77.5 from its high for this recovery. It remained up from the December '08 low of 18.0. Sixty percent of respondents reported higher prices while only 5% indicated lower prices. During the last twenty years there has been an 83% 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.

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