Presenting The Inventory Schizophrenia Of The Chicago PMI And The Manufacturing ISM
To many the significant beat of today's Manufacturing ISM was not very surprising based on yesterday's higher than expected Chicago Purchasing Managers Index. As most economists know, the Chicago PMI has traditionally been a spot on predictor of that other more comprehensive survey, the Mfg ISM. Indeed, as Wikipedia explains, "The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity." Traditionally the correlation has been in the 80s and higher. Sure enough, anyone who simply bought the market on an expectation that the ISM would replicate the Chicago PMI won. Yet the biggest surprise was beneath the surface, where a more granular read indicates some very violent schizophrenia. As Goldman said earlier, when reporting on the ISM: "a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index." Said differently, nearly two thirds of the total beat came from a jump in inventory levels. Yet what happened in the Chicago PMI yesterday? Well: take it from the horse's mouth. The Chicago Business Barometer called it a "precipitous decline" after it plunged from 61.6 to 46.96, the biggest drop in years.
Which number is real? Is Chicago's much more focused inventory number accurate, in which case the ISM is massively misrepresenting reality, and inventory, not to mention the composite, is actually collapsing, or, as we pointed out, is this merely a delayed reaction, and the ISM will now tumble following this abnormal jump in inventories, in which case next month's ISM will be in the 45 range, as predicted by the New Orders less Inventories leading indicator. One thing is certain: only computers can continue trading in which day to day datasets indicate an unprecedented degree of schizophrenia at the economic data manipulation level.
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