The Composite Index of activity in the manufacturing sector, reported by the Institute of Supply Management (ISM), fell slightly last month to 52.0 from 52.9 during August. A reading above 50 indicates growth in factory sector activity. Consensus expectations had been for a reading of 52.5.

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.

Declines in three of the index's five components accounted for the lower composite index. New orders fell for the third consecutive month. The 1.9 point drop left the index at its lowest since level since March. The production component fell for the second month in the last three. The drop in the inventories component was the last component moving down. The 3.8 point decline was to the lowest level since January.

Moving up was the employment index. The modest 0.4 point uptick, however, only recouped a piece of earlier declines. 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. Finally, the 1.9 point rise in the supplier delivery index reversed about all of the sharp decline during August.

The index of new export orders moved lower. The sharp 2.5 point decline during August left the index at its lowest level since March. The import index, on the other hand, rose slightly but only reversed a bit of the huge declines earlier this year.

The prices index moved lower again, to its lowest level since January. Just 30% of the respondents reported an ability to raise prices. 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.

Systemic Risk and the International Lender of Last Resort is a speech by Federal Reserve Board Governor Frederic S. Mishkin and it is available here.