January 3, 2008 – In Wednesday's data, the ISM diffusion index of U.S. manufacturing activity fell by 3.1 index points to 47.7 in December – signaling a decline in December manufacturing activity (Chart 1).
December’s index level was the lowest since April 2003 (Chart 2).
The economy was not in a recession in April 2003, and it would be premature to conclude that the economy is in a recession now. Nevertheless, such weak readings on manufacturing activity are unusual for a growing economy.
According to the ISM press release “…December was apparently a very tough month as New Orders, Production and Employment were all below the break-even mark of 50 percent.”
Among these components, the new-order index showed the most dramatic decline, falling by 6.9 index points to 45.7 in December (Chart 3). That was its lowest level since the last recession.
According to the ISM, housing-related industries bore the worst of this falloff in demand, and export-oriented industries suffered the least.
Manufacturers also complained that strong growth in input prices has been squeezing their profit margins. The ISM input price index rose by 0.5 index points to 68.0 in December – still signaling very strong cost growth (Chart 4).
However, given continuing weakness in the demand for manufactured goods, these cost increases would pose a much smaller inflation threat than they would in a stronger demand environment.