- The Washington Times - Thursday, January 2, 2003

NEW YORK, Jan. 2 (UPI) — The Institute for Supply Management said Thursday economic activity in the manufacturing sector grew for the first time in four months during December.

The group's much watched manufacturing index jumped 5.5 points to 54.7 in December from 49.2 percent in November and 48.5 percent in October.

Economists on Wall Street were expecting the index to improve to 50 percent during the month.

The index has been under 50, signaling contraction, since September. The index is closely watched by Wall Street 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 growing even though the manufacturing sector is contracting. Any level below 43 indicates that the economy is in recession.

Investors watch the report because it dictates how various types of investments will perform. 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 rebounded in December. The question at this point is whether the manufacturing sector can continue to gather momentum during the first quarter of 2003."

The report showed the group's backlog of orders index indicated that order backlogs declined for the sixth consecutive month. ISM's supplier deliveries index reflected slower deliveries for the 12th consecutive month and manufacturing employment continued to decline during the final month of year as the index remained below the breakeven point of 50 percent for the 27th consecutive month.

The group's prices index rose above 50 percent as manufacturers experienced higher prices for the 10th consecutive month. New export orders grew during the month after a one-month decline while imports grew for the second consecutive month.

Comments from purchasing and supply executives in some instances indicated improvement in new orders during December. But, there were still those who saw little if any improvement in their business.

ISM said, "The situation with Iraq appears to still be weighing on some. The uncertainty remains a deterrent to business."

The group said its new-orders index climbed to 63.3 percent from 49.9 percent in November while its production index rose 1 percentage point to 55.6 percent from 54.6 percent in November.

The employment index improved to 47.4 percent from 43.8 percent in November and the supplier deliveries index rose to 51.4 percent from 50.8 percent.

ISM's inventories index rose to 46.2 percent from 42.1 percent in November while the customers' inventories index fell to 43 percent from 46.5 percent.

The prices index improved to 56.9 percent from 55.7 percent, the backlog of orders index rose to 46.5 percent from 42.5 percent in November, the new export orders index rose to 52.2 percent from 49.1 percent and the imports index rose 55.3 percent from 53.1 percent in November.

"Overall, these positive signs may help provide momentum for the first quarter as companies start to see some improvement. The magnitude of the improvement is somewhat difficult to explain at this point. One respondent mentioned the mid-week holiday as a motivator for customers to place increased orders to cover their needs," Ore said.

The report also showed of the 20 industries in the manufacturing sector, 11 industries reported growth and there were no reports of commodities in short supply.

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