Chicago PMI Unexpectedly Crashes: New Orders, Production and Employment Down by More Than 10%

Unexpected Chicago PMI Crash

Looking for signs of strength? You will not find them in today's Chicago PMI report.

The Bloomberg Consensus estimate was for a 53.1 expansion reading. Instead, the PMI came in at 46.2, well below the bottom of the consensus range of 51.0 to 54.0.

Readings below 50.0 indicate contraction.

New Orders, Production and Employment Down by More Than 10%

For details, let's turn to the Chicago ISM Report that shows Business Barometer Back into Contraction in May.

The Chicago Business Barometer fell sharply back into contraction in May, reversing all of April’s gain and casting doubt on the strength of the widely expected bounceback in the US economy in the second quarter. The Barometer fell 6.1 points to 46.2 in May from 52.3 in April. All five components of the Barometer weakened with three dropping by more than 10% and all of them now below the 50 breakeven mark.

April’s positive move had suggested that the first quarter slowdown was transitory and had been impacted by the cold snap and port strikes. May’s weakness points to a more fundamental slowdown with the Barometer running only slightly above February’s 5½-year low of 45.8. The three month average, although little changed on the month at 48.3, is significantly down from 61.3 in Q4 2014 and barring a sharp rebound in June points to continued sluggish growth in the second quarter.

The decline was led by a 13.8% fall in New Orders to 47.5 from 55.1 in April, pushing it into contraction for the third time this year. In line with the lower order intake, both Production and Employment Indicators suffered double-digit losses in percentage terms between April and May, with the latter falling to the lowest since April 2013. Order Backlogs declined more moderately, remaining in contraction for the fourth consecutive month.

There was further evidence that the period of oil driven softer prices has run its course. Prices Paid jumped sharply back into expansion in May to the highest since December.

Chicago PMI



Telling Stats

Unlike strict manufacturing PMI reports, the Chicago PMI is a survey of manufacturing and non-manufacturing (services), tracking all aspects of the Chicago economy.

Here is one more telling stat from the report: "42% of companies said their current inventory level was too high compared with 12% in a comparable question asked in November 2014. 53.2% said stock levels were about right, with less than 5% reporting them as too low."

So don't go looking for an inventory rebuild to lead the way out of this slump.

Recession Call

I don't believe this is a "Chicago Only" problem. But it could be an indication that Illinois will be harder hit by the next recession than other areas.

Nationally, economists are looking for close to 3% annualized growth for second quarter. I am sticking with my recession call made back on January 31.

• Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling or Not?
• Canada in Recession, US Will Follow in 2015

For comments on current recession odds, first quarter GDP revisions, and second quarter GDP estimates, please see First Quarter GDP -0.7%; GDPNow Second Quarter Forecast +0.8%; Economists Get Zero Accolades; Smoothed Recession Odds from earlier today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.