The ISM manufacturing survey for January shows a loss of momentum after a small pickup in December. The Purchasing Managers’ Index dropped to 49.3 in January from 51.4 in December. Readings below 50.0 denote a contracting factory sector. The basic message of the January survey is that the factory sector is not moving along at a brisk pace and it is one of the many indicators signaling slow growth in the economy.

Indexes tracking production (49.6 vs. 52.4 in December) and inventories (39.9 vs. 48.5) dropped sharply. Although the new orders index is holding above 50.0 (50.3 vs. 51.9 in December), the pace of activity slowed compared with December. The employment index was virtually unchanged at 49.5 and the supplier deliveries index stood at 52.7 vs. 53.3 in December.

Core Inflation Is Moving In the Direction that FOMC Wishes

Consumer spending rose 0.7% in December after a 0.5% gain in November. Inflation adjusted consumer spending increased 0.3% in December following robust increases of 0.5% in the each of the previous two months. Arithmetically, the strong reading of December is a favorable set up for the first quarter of 2007. Personal income increased 0.5% in December, after advancing 0.3% in the prior month. Personal saving as a percentage of disposable income was negative 1.2% in December. In 2006, personal saving was negative 1.0% of disposable personal income, the second consecutive annual average when consumer spending has outpaced personal income.

The personal consumption expenditure price index increased 0.4% in December after holding steady in November. The core personal consumption expenditure price index, the Fed’s preferred inflation measure, moved up 0.1%, putting the year-to-year increase at 2.22% nearly matching the 2.21% in November. The recent high of this price measure was a 2.44% year-to-year increase in August 2006. The decelerating trend of core inflation has allowed the FOMC to stay on the sidelines and watch.

Labor Market Sends Bothersome Signals

Initial jobless claims fell 20,000 to 307,000 during the week ended January 27. Seasonally unadjusted initial jobless claims rose 12.9% from a year ago, marking the third consecutive weekly gain. This trend has held in a positive range for four out of the last six weeks.

Continuing claims, which lag initial claims by one week, increased 71,000 to 2.553 million and the insured unemployment rate held steady at 1.9%. As chart 5 shows, the upward trend of continuing claims and the positive readings of the year-to-year change in seasonally unadjusted initial jobless claims point to sluggish labor market conditions. The January employment report, scheduled for publication on February 2, will offer additional insight.