We warned last month that under the covers Chicago PMI looked a lot weaker than the headlines and this morning's collapse confirms that. Against expectations of a small rise to 63.0, Chicago PMI plunged from 62.6 to 52.6 (13-month lows) for the biggest miss on record. According to the release itself, "A monthly fall of this magnitude has not been seen since October 2008 ." The was an 8 standard-deviation miss from analyst expectations (Joe Lavorgna was on the high side at 63.0). New orders, inventory, production, order backlogs, and prices paid all dropped (but employment rose?). This is the biggest 2-month drop since Lehman (and 2nd biggest since 1980). We await the seasonal adjustment "correction" as MNI get the call from Yellen.
This is the biggest 2-month drop since Lehman (and 2nd biggest since 1980).
- Forecast range 60 - 65 from 47 economists surveyed
- Prices Paid fell compared to last month
- New Orders fell compared to last month
- Employment rose compared to last month
- Inventory fell compared to last month
- Supplier Deliveries rose compared to last month
- Production fell compared to last month
- Order Backlogs fell compared to last month
Of course, very quick damage control was needed and sure enough:
In spite of the sharp decline this month, feedback from purchasing managers was that they saw the downturn as a lull rather than the start of a new downward trend. This was especially so given the recent strong performance and the fact that Employment managed to increase further in July.
Cognitive dissonance much? Because at the same time:
Nonetheless, following a strong Q2, this was clearly a poor start to Q3 and as such tempers some of the increased optimism in recent months. Production’s large decline in July left the indicator barely in expansionary territory and at a two year low, although this followed a very strong run with output above 70 in June. New Orders, the most heavily weighted component of the barometer, saw its biggest monthly set back since November 2013. Order Backlogs, which have expanded in every month since last October, fell into contraction in July.
Also, kiss the inventory-driven GDP expansion goodbye:
Growth in inventories eased in July from a seven month high in June, while Prices Paid fell for the second consecutive month but remained well above 50.
Commenting on the MNI Chicago Report, Philip Uglow, Chief Economist at MNI Indicators said, “The surprise fall in the Chicago Business Barometer in July, following a strong second quarter, naturally raises questions about the sustainability of the recovery. Some feedback from panellists points to this being a temporary setback, although we’ll need to see the August data to judge to what extent this is a blip“.
Charts: Bloomberg, source: PMI