Manufacturing Dip

The ISM released its purchasing managers' report for the US
manufacturing sector for 12/07 today. The full index declined
well more than was generally expected, and the index for new
orders fell sharply. The export order component was not
spared, either. The data is consistent with a contraction of
manufacturing activity, and the sharply weaker new orders
index bodes ill for the near term future.

The ISM index fell to 47.7. Contraction in manufacturing can
start when the index falls below 50.0, and profit margins do
not hold up below the 50.0 level, either. A decline in this
index to the 43 - 44 area is thought consistent with development
of a recession. The one positive sign was that inventories
do not yet appear to be bloating up.

The drop in this monthly index is consistent with the weekly
leading indicators which have been trending significantly lower
since July, 2007.

Traditionally, the Fed has responded to weakness of this
magnitude in the manufacturing sector with cuts to the FFR%.

The sell off in the stock market reflects investor realization
that deterioration of profit margins is widening.