Last Wednesday’s plunging Chicago PMI (Purchasing Managers Index) reading rekindled recession fears and shook up equity markets.
Then Friday’s ISM (Institute for Supply Management) PMI numbers came out. While the national-based index was also under 50, it showed an uptick from September’s 10-year low level.
As a result, markets shoved the recession narrative to the curb and stocks rallied to new all-time highs.
Manufacturing’s under pressure across the American landscape precisely because the U.S. is in a battle over manufacturing and trade with the world’s second biggest economic power, China.
It should come as no surprise, tariff wars aren’t only hitting China, they’re knocking down U.S. domestic manufacturing too.
Plunging Chicago PMI
The MNI Chicago Business Barometer, more commonly referred to as Chicago PMI, reflects the business environment in Chicago.
The indicator, prepared by the non-profit organization Market News International Inc., in cooperation with the Chicago branch of the Institute for Supply Management (ISM), is calculated based on a survey of purchasing managers in the Chicagoland area.
Respondents are polled to assess production volume, new orders, backlogs, unemployment and supplies in their firms. Instead of providing a quantitative measure, respondents provide a relative assessment of changes in the current month: whether the situation has improved, worsened, or hasn’t changed.
Readings above 50 point to improvement of the business climate in the region, and readings below 50 indicate negative changes.
The Chicago-centric gauge coming in at 43.2 for October, a substantial decline from September’s 47.1 reading, was the lowest level since December 2015. Economists had expected a reading of 48.3, according to Econoday.
New orders declined to 37, the lowest level since March 2009.
“The picture is one of continued stress in the manufacturing economy, thanks mostly to the direct impact of the tariffs and the uncertainty over the future direction of trade policy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
National PMI numbers are down three months in a row, but not down for the count.
The manufacturing PMI from the Institute for Supply Management came in at 48.3% for October, better than September’s 47.8% reading, but below economists’ 49.1% expectations.
Not only is the October number an improvement over September, which followed August’s sub-50 reading, the three-month dip comes on the heels of a 35-month expansion run of PMI readings that averaged 56.5%.
September’s 47.8% gauge was the PMI’s lowest reading since June 2009 as exports tanked under escalating trade war pressure.
Speaking about October’s improved reading Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement, “Comments from the panel reflect an improvement from the prior month, but sentiment remains more cautious than optimistic.”
The production index was only 46.2% in October, compared with the September reading of 47.3%, with the backlog of orders index at 44.1%, contracting for the sixth straight month, versus the September reading of 45.1%, according to ISM.
“Inputs – expressed as supplier deliveries, inventories and imports – were again lower in October, due primarily to supplier delivery contraction offset by improvements in inventories,” Fiore said.
Still, the latest report also showed signs of recovery, spurring analysts to believe the manufacturing slowdown isn’t accelerating.
How Markets Overlooked and Overcame the Slowing Manufacturing Numbers
New orders, employment and inventories all showed improvement last month.
“The outlook for [the] nation’s factories isn’t growing any worse and the manufacturing recession isn’t intensifying,” Chris Rupkey, chief financial economist at MUFG, said in a note. “There are even some green shoots for the manufacturing sector as orders are picking up and orders lead the way forward for production and output and jobs.”
What the Chicago area’s weakness did to stocks on Thursday morning, knocking the Dow down 200 points, was completely erased on Friday, and then some, when the ISM’s national numbers showed an uptick.
It’s all about the recession narrative and its being on the front burner or back burner or being relegated to the dustbin where it belongs.
And if anyone’s wondering where the narrative is, they only need to look at equity markets to see it’s in the dustbin.
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