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Economy in Brief

ISM Manufacturing Index Reaches Highest Since 2004
by Tom Moeller February 1, 2010

The pace of improvement in the U.S. factory sector picked up steam in the new year. The National Association of Purchasing Management reported that its January composite index showed unexpected strength, for the second consecutive month, rising to 58.4 from 54.9 during December. The latest figure was the highest since August 2004 and was up from the low of 32.9 reached in December '08. The latest jump exceeded Consensus expectations for a reading of 55.2. (Any figure above the break-even point of 50 suggests rising activity.) Last year's figures were revised due to updated seasonal factors and the ISM data is available in Haver's USECON database.

The latest ISM level is consistent with roughly 4.0% growth in factory sector output. This positive growth rate resembles recoveries from past severe recessions but to fully mirror the strength of those recoveries the index needs to rise to a level near or above 60. 

The production component posted the strongest m/m gain last month but remained lower than its 2004 high. 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.

The employment index also posted a strong increase to 53.3 which indicated positive growth in factory sector payrolls for three out of the last four months. It's up from a low reading of 25.9 last February. Fifteen percent of respondents indicated higher payrolls versus only five percent last January. Twelve percent indicated a lower level of hiring versus 49% last January. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The rise in the inventory component to 46.5 brought it back near the October high. Sixteen percent (NSA) of respondents indicated that they were raising inventory levels versus 18% last January. During the strong 2005 inventory accumulation 26% of firms indicated that they were raising inventories. Twenty-four percent of respondents indicated lower inventories last month. The vendor performance indicator which measures the speed of deliveries rose to 60.1. This indication of slower speeds was its highest since 2005.

The new orders index showed a lesser m/m increase, but it reached a new high of 65.9. The export order index also rose to a new high and was up from its low of 35.5 in December '08. 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.

The separate index of prices paid also rose to a new cycle-high of 70.0. That was up from the December '08 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. Forty-four percent of respondents reported higher prices while only 4 percent indicated lower prices.

The ISM data are available in Haver's USECON database.

Focusing on Bank Interest Rate Risk Exposure is Friday's speech by Fed Vice Chairman Donald L. Kohn and it is available here.

ISM Mfg January December November Jan. '09 2009 2008 2007
Composite Index 58.4 54.9 53.7 35.5 46.2 45.5 51.1
  New Orders 65.9 64.8 61.5 33.2 51.6 42.1 54.3
  Employment 53.3 50.2 49.6 29.0 40.5 43.3 50.5
  Production 66.2 59.7 60.2 30.8 50.4 45.2 54.1
  Supplier Deliveries 60.1 56.8 55.7 45.9 51.4 51.6 51.2
  Inventories 46.5 43.0 41.4 38.4 37.1 45.5 45.4
Prices Paid Index (NSA) 70.0 61.5 55.0 29.0 48.3 66.5 64.6
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