- The Washington Times - Monday, February 3, 2003

NEW YORK, Feb. 3 (UPI) — The Institute for Supply Management said Monday economic activity in the manufacturing sector grew for the third consecutive month during January, though the rate of growth slowed from December.

The group's much-watched manufacturing index slipped 1.3 percentage points to 53.9 in the first month of 2003 from 55.2 in December but remained above the 49.2 percent posted in November. Most economists on Wall Street were expecting the index to ease to 54 percent during the month.

Wall Street closely watches the index because a reading below the key 50 level indicates the sector comprising one-fifth of the economy is shrinking. A reading above 50 percent indicates that the manufacturing economy is generally expanding.

A level above 43 or so, but below 50, indicates that the U.S. economy is still growing though the manufacturing sector is contracting. Any level below 43 indicates that the economy is in recession.

Investors watch the report because they need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets.

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets.

More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation.

The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.

Norbert J. Ore, chairman of the Institute for Supply Management's Manufacturing Business Survey Committee, said: "The manufacturing sector continued its growth trend in January, though the rate of growth slowed when compared to December.

"It is encouraging that new orders continued strong in January. Production also fared well, providing cause for optimism for an improving economy in the first quarter."

The latest report from ISM showed the backlog of orders index indicated that order backlogs declined for the seventh consecutive month while the supplier deliveries index reflected slower deliveries for the 13th consecutive month.

Manufacturing employment continued to decline in January as the index remained below the breakeven point, or an index of 50 percent, for the 28th consecutive month. The group's prices index was above 50 percent as manufacturers experienced higher prices for the 11th consecutive month.

New export orders grew in January for the 13th consecutive month while January's imports index grew for the third consecutive month.

Comments from purchasing and supply executives offered some expressions of optimism while still expressing concerns about possible war.

ISM said adding to the list of concerns, energy prices were a major factor as oil and natural gas prices are skyrocketing.

The group said its new orders index declined 3.2 percentage points to 59.7 percent from 62.9 percent in December, the production index declined 0.3 percentage point to 56.3 percent from 56.6 percent and the employment index slipped to 47.6 percent from 48.2 percent a month earlier.

The supplier deliveries index remained at 52.6 percent, the inventories index declined to 45.4 percent from 46.2 percent and the customers' inventories index slipped to 42.5 percent from 43.0 percent.

ISM's prices index improved to 57.5 percent from December's 56.9 percent, the backlog of orders index declined 1.5 percentage points to 45 percent from 46.5 percent, the new export orders index rose to 55.6 percent from 52.5 percent and the imports index rose to 59 percent from 54.8 percent in December.

"Overall, the signs are still positive for the first quarter. The strength in new orders is encouraging as both domestic and export orders are growing. Customers' Inventories remain low and provide prospects for continuing strength in New Orders," Ore said.

The report also showed of the 20 industries in the manufacturing sector, nine industries reported growth including apparel; transportation & equipment; furniture; food; chemicals; electronic components & equipment; fabricated metals; industrial & commercial equipment & computers; and primary metals.

"There were no reports of commodities in short supply," Ore added.

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