U.S. ISM Index Is Lowest Since April

The loss of forward momentum behind the factory sector's recovery is clear, though activity still is expanding. The July Composite Index from the Institute for Supply Management fell to 55.2 from 56.2 in June. The latest figure was higher than Consensus expectations for a reading of 54.0 but it was the third consecutive month of decline. The July level suggests expansion in factory sector activity as it is the twelfth consecutive figure above 50 and 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.

Continuing the recent pattern, declines in new orders and production were the biggest of the component series. Countering this weakness was an uptick in the employment index series to 58.6 which was off just slightly from its May high. The reading has been above 50 since December. 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. Inventory accumulation bolstered factory sector activity with a rise in the measure after three months of decline. Finally, the pace of vendor deliveries slowed (index rose) after three months of quickening.

Activity abroad did little to offset weakness in the U.S. The export order index ticked up just slightly m/m to 56.5. That remained down sharply from its May high of 62.0 and was close to the lowest level since December. 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 percent of respondents reported higher export orders while seven percent reported them lower.

The separate index of prices paid held roughly steady m/m at 57.5 which was nearly the lowest level since November. Still, it remained up from the December '08 low of 18.0. Just 33% (half the recent high) of respondents reported higher prices while 18% 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.

Seven Faces of "The Peril" by James Bullard, President, Federal Reserve Bank of St. Louis can be found here. The paper emphasizes that (1) The FOMC's extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, theU.S. quantitative easing program offers the best tool to avoid such an outcome.

ISM Mfg	July	June	May	July '09	2009	2008	2007
Composite Index	55.2	56.2	59.7	49.1	46.2	45.5	51.1
New Orders	53.5	58.5	65.7	55.5	51.6	42.1	54.3
Employment	58.6	57.8	59.8	45.9	40.5	43.3	50.5
Production	57.0	61.4	66.6	59.0	50.4	45.2	54.1
Supplier Deliveries	58.3	57.3	61.0	51.7	51.4	51.6	51.2
Inventories	50.2	45.8	45.6	33.3	37.1	45.5	45.4
Prices Paid Index (NSA)	57.5	57.0	77.5	55.0	48.3	66.5	64.6