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ISM index provides hope for recovery

Don Hogsett, January 14, 2002

A key gauge of U.S. manufacturing activity climbed more than expected for a second straight month in December, in a hopeful sign that the battered manufacturing sector may finally be climbing out of a 17-month-long trough.

The widely watched barometer of manufacturing activity, the monthly Purchasing Managers' Index compiled by the Institute for Supply Management (formerly called the National Association of Purchasing Managers, or NAPM) shot up in December to a new level of 48.1 from a level of 44.5 in November. Economists had been expecting a much more subdued reading of 45.5.

The December rebound marks a second straight improvement, following November's run-up, and could mark the beginning of a rally that lifts the sector from its decade-long low of 39.8 touched in October 2001.

Despite the improvement of the past two months, an index reading beneath 50 indicates the giant manufacturing sector — which accounts for roughly a sixth of the U.S. economy — is still contracting, just at a much slower pace. Underlining the depth and extent of the recent slump in manufacturing, the ISM Index has remained beneath the waterline since August 2000, the most severe decline in manufacturing activity since the 1990-1991 recession.

"While the manufacturing sector continues to decline, the rate of decline has slowed very quickly, giving some hope that recovery may come faster than is generally found in a major downturn," said Norbert Ore, chairman of the ISM's Manufacturing Business Survey Committee and head of sourcing and purchasing for Georgia-Pacific Corp.

"In December, both new orders and production returned to a growth scenario, and the trend for most of the indexes is definitely in the right direction," said Ore. The monthly ISM Index is based on a canvass of purchasing executives at more than 350 companies.

In particularly hopeful signs, two key indices moved into positive territory in December, rising above the benchmark levels of 50 and actually growing, rather than contracting, the ISM reported.

The New Orders Index rose to a level of 54.9, up sharply from 48.8 in November, following two straight months of decline, and is now at its highest level since April 2000. Industries reporting gains included textiles, apparel, furniture, food, leather, instruments and photographic equipment and electronic components and equipment. That could mean that two big industries, home furnishings and high-tech, are both recovering from a long malaise.

The key Production Index also moved out of reverse in December with a reading of 50.6, up strongly from 47.1 in November. Gainers were the same as for the New Orders Index, with the exception of textiles, which remained stuck in a production rut.