The Chicago PMI fell to 49.0 (consensus 52.5) in April, dropping below the
breakeven level of 50 for the first time since September 2009. This result
increases the risk that the ISM manufacturing index may also weaken, and
therefore we lower our forecast for the April ISM index (released tomorrow)
from 52.0 to 49.5. Over the past year, new orders have been too tepid and too
unreliable to generate sustained growth in manufacturing activity. As a result,
manufacturers are understandably cautious and are choosing to keep production
and employment levels relatively steady.
FACTS
The headline Chicago PMI fell to 49.0in April from 52.4 in March.
The new orders index rose to 53.2 from 53.0.
The order backlog index fell to 40.6 from 45.0.
The production index fell to 49.9 from 51.8.
The supplier deliveries index fell to 47.9 from 58.0.
The employment index fell to 48.7 from 55.1.
IMPLICATIONS
The Chicago PMI has decelerated noticeably over the past year. The index
averaged around 61 in both 2010 and 2011, but then slowed to an average of 54.6
in 2012. The weakness was especially pronounced in Q4, when the index hovered
just above 50. After a short-lived bounce to 56.8 in February, the Chicago PMI
has now fallen to 49.0 in April, the lowest reading since September 2009.
New orders have been too unreliable to generate sustained growth in
manufacturing activity. The Census Bureau’s official data on manufacturing new
orders shows a steep slump during the summer months of 2012, partly reflecting
uncertainties related to the presidential election and the year-end fiscal
cliff. As a result of the “missing” orders, the overall backlog of orders for
durable goods has been trending sideways for the past 12 months. For capital
equipment - a major product category for the Chicago region - the backlog of
orders peaked in May 2012 and has since declined by about 4.5%.
The softness in orders was evident in today’s Chicago PMI survey. Although the
new orders index was steady at 53.2, the order backlog index moved downward
sharply to a new low of 40.6. Underlying demand has been too weak to generate
an increase in unfilled orders.
As a result, Chicago area manufacturers are choosing to hold their activity
levels roughly steady. In today’s survey, both the production and employment
indexes were close to 50.
BOTTOM LINE: We expect that the softness in Chicago manufacturing also applies
to overall manufacturing activity across the country. We lower our forecast fo
the April ISM manufacturing index (released tomorrow) to 49.5, from our earlier estimate of 52.0