ISM’s February Indices: A Net Improvement, with Much More Needed

The two February reports from the Institute for Supply Management (ISM) on the state of the economy came in, on the whole, better than January — but that’s not saying much.

ISM’s Manufacturing Index, released Monday, came in at 48.3, representing a retreat into contraction after a slight-expansion 50.7 reading in January (any reading above 50 means expansion). While it did slightly beat analysts’ expectations of 48.1, a look at the history (revised a bit as of the first of the year) shows that the sector is treading water, having contracted in two of the past three months, while failing to break 50.7 in the past six.

The silver lining in the Manufacturing report is ISM’s statement that “the overall economy grew for the 76th consecutive month.”

It must not have grown by much, because today’s Non-Manufacturing Index (NMI) also came in showing a slight contraction. Though February’s 49.3 reading was a vast improvement over January’s awful 44.6, it’s the second month in a row of contraction after an unprecedented 57-month expansion streak.

Taken in combination, February was better than January, but a far cry from December. Here is how the months compare, when combining the indices using a 15-85 Manufacturing/NMI weighting:

December 2007 — (.85 x 53.9) + (.15 x 48.4) = 53.07
January 2008 — (.85 x 44.6) + (.15 x 50.7) = 45.51
February 2008 — (.85 x 49.3) + (.15 x 48.3) = 49.15

Overall, the weighted indices are a bit less than halfway back to where they were in December. That’s going back in the right direction, but more is needed. Perhaps the recently-passed stimulus package will help bring things back, but passing legislation to keep the 2003 federal income-tax system in place, and then cutting rates further, would have been much better tonics.