U.S. Manufacturing Activity in December Lowest Since 1991

The Purchasing Managers Index, an important indicator of sentiment in the manufacturing sector, fell to 43.7 in December, the lowest reading for this index since April 1991.

The PMI, conducted by the National Association of Purchasing Management, is a survey of purchasing executives to gauge sentiment in the manufacturing component of the economy.

The Treasury market rallied sharply on the news, as bond prices react sharply to indications that the economy is slowing. Lately the 10-year Treasury bond was traded at 105 13/32, up 20/32, yielding 5.035%, compared with 105 4/32, yielding 5.067%, prior to the report's release. The euro has also gained ground against the dollar on the news, continuing a trend that shows currency markets believe the U.S. economy is weakening in comparison to the European economy.

When the PMI, colloquially called NAPM, reads above 50, it indicates expansion in the manufacturing sector, and when it's below 50, it indicates contraction. Extremely high or extremely low readings on this index are generally associated with sharp expansion or slowing in the overall economy.

This report augurs more aggressive interest-rate cuts by the Federal Reserve because it's considered a fairly reliable indicator of the direction of the economy, although its scope is somewhat limited.

One caveat, however: The NAPM's prices paid index, an indication of what producers are paying for goods, rose to 61, 4.4 points above the November reading of 56.6. That's potentially inflationary -- especially if companies are seeing a decline in demand.

Fed funds futures , a proxy for the market's assumptions about monetary policy, are rallying, assuming a greater chance of more rate cuts in the first half of the year. Manufacturing represents less than 20% of the economy, much less than it did a few decades ago.

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