Wednesday, September 1, 2010

Chicago PMI Drops, But Is Still Positive

From Bloomberg:

Chicago purchasers report solid but slower month-to-month growth in August. The Chicago purchasers' index came in at 56.7, down sizably from 62.3 in July but still well above breakeven 50. New orders rose in the month, at an index of 55.0 but down from July's 64.6 for the slowest reading of the year. In an offset, backlogs, at 56.2, show a very strong gain for the month. Inventories are a negative, down more than four points to 46.5 to signal month-to-month contraction. But given solid shipping activity, some of this draw likely reflects production needs. Other readings indicate solid activity including greater slowing in deliveries and steady a month-to-month increase for employment.

The thing to remember with diffusion indexes is that lower readings are not necessarily a disaster. The readings in this report are holding well above 50 to indicate continued growth underway for the Chicago economy. The data point to favorable though slowing readings for tomorrow's ISM report on the manufacturing sector and Friday's ISM report on the non-manufacturing sector.

Here is a link to the report:

Here is a chart of the salient data:

Click for a larger image

Notice that the production and new orders numbers dropped. Also note that are both above 50, indicating expansion.

The size of the drop could be important. The numbers were printing solidly about 60 for the last 5 months and yesterday they dropped almost 10 points to mid-50's readings. This is in line with the drops we have seen in several regional manufacturing reports over the last few months.


NDD here: I just wanted to add a couple of notes, not about the Chicago index, but rather the ISM manufacturing index, which was surprisingly strong.

Another strongly positive surprise was the employment index which came in at 60.0. Early this year, when we were getting stubbornly negative employment readings (subsequently revised to positive), I looked at trends in the ISM index and payrolls, concluding as follows:

My original "Leading Employment Index" relied on an ISM manufacturing reading above 53. We can tweak that in a manner consistent with both above graphs by insisting on the following as a prerequisite to job growth:

both [ISM manufacturing and non manufacturing] indexes be above 52 and average 53 or higher as a final signal, which gives one or two months' lead time to job growth.
ISM non manufacturing has been hovering near 54 in the last couple of months, and the ISM non manufacturing employment sub-index has been at or below 50. That report won't be released until after the BLS report. With ISM manufacturing strong, Challenger strong, and ADP weak, we have a picture very much like the end of last year.

As an aside, vendor deliveries also declined. This is one of the 10 LEI, and will detract about -0.1 from the LEI for August.

Bonddad here: nothing more to add, I just don't want NDD to have the last word