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Economy in Brief

U.S. ISM Non-Manufacturing Index Down Sharply, Lowest Since 2001
by Tom Moeller February 5, 2008

The January Business Activity Index for the non-manufacturing sector, from the Institute for Supply Management, fell out of bed to 41.9 from 54.4 in December. A figure above 50 indicates rising activity and the latest was quite a bit lower than Consensus expectations for a reading of 52.5.

Since the series' inception in 1997 there has been a 44% correlation between the level of the Business Activity Index in the non-manufacturing sector and the Q/Q change in real GDP for the services and the construction sectors. The correlation of the factory sector ISM index with the change in real GDP less just services is a higher 57%, though over the last ten years it only has been 34%.

The January level was the lowest since October 2001 and it was the first below 50 since 2003. October 2001 was about the end of that year's economic recession. The 12.5 point drop in the index from December was a record m/m decline.

The new orders sub index dropped ten points m/m to a reading of 43.5, the lowest since 2001.

The employment sub index similarly fell sharply to its lowest level since 2002. Since the series' inception in 1997 there has been a 56% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.

Pricing power eased slightly m/m for the second month. Since inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.

ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates back to July 1997.

The Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the ISM manufacturing sector composite index is a weighted average of five components.

Released yesterday, The Budget Message of the President can be found here and The Nation's Fiscal Outlook is available here.

ISM Nonmanufacturing Survey January December January '07 2007 2006 2005
Business Activity Index 41.9 54.4 57.9 56.0 58.0 60.2
Prices Index 70.7 71.5 56.1 63.8 65.3 68.0
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