The ISM manufacturing index for December dropped more than expected to 32.4 from 36.2 in November. This represents both the sixth consecutive drop in the index from a recent peak in June of 50.2 and the lowest reading of this index since May 1980's reading of 29.4. Expectations had been for the index to drop more moderately in December to 35.4.

Weakness in manufacturing was evident in all of the major sub-components of the index. The production measure dropped to 25.5 in December from 31.5 in November while the new orders component fell to 22.7 from 27.9 over the same period. The current level for new orders represents a record low for this indicator. Similarly, the employment index dropped to 29.9 from 34.2 in November which represented the lowest reading since November 1982's 28.2. The prices paid index dropped to its lowest level since 1949 of 18.0 from 25.5 in November.

The average level of the ISM index for manufacturing over the past three months of 30.4 is well below levels flagging the entry into negative growth territory of around 44. This is consistent with our current projection of Q4 GDP growth dropping a very pronounced 6.1%, at an annualized rate.

The decline in Q4 is expected to represent the quarter of greatest weakness in the current recession. An expected easing in the pace of decline through the first half of 2009 is largely a result of very aggressive policy actions by the Fed in both cutting Fed funds rates about as low as it can go to a range of 0% to 0.25% and injecting massive amounts of liquidity into the system via quantitative easing. These actions are expected to continue to provide relief in terms of easing the high cost of capital. Fiscal policy will also provide significant support with the $170B package introduced by the Bush Administration earlier in 2008 getting trumped by the incoming Obama Administration's reported plans to introduce a package of $700B to $1T in size.