Conclusion: Our interpretation of the Chicago PMI is that it is a golf clap at best. We are adding to our short position in U.S. equities (via SPY) and long position in U.S. Treasuries based on better prices created by today’s PMI story telling.
There is no disputing that the headline Chicago PMI number reported today was better than expectations. The median forecast of analysts was for 54.0, and the number came in at 61.1. This was also a sequential improvement from May, which was a 56.6 reading. So, is this positive on the margin? Sure, but if we look at the longer term, even a 61.1 PMI isn’t overly exciting.
While not exactly the long term, we have attached below a chart of PMI going back twelve months. The key take away from this chart should be the dramatic decline of both May and June from the first four months of 2011. The PMI reading for January to April of 2011 ranged between 66.8 and 71.2. So, the Chicago area economy continues to trend well below economic levels from earlier in the year.
There are a number of details within the report that are worth flagging:
- Order backlog in June dropped to 49.1, which was a sequential decline from May’s reading of 51.7 and the first drop below neutral since September 2010;
- Inventories saw a “precipitous decline” from May and came in at a reading of 46.9 in June versus 61.6 in May;
- Prices paid are still expanding, albeit at a slower rate and declined to 70.5 in June from 78.6 in May (Deflation of the Inflation).
A number of comments from the survey are also worth highlighting:
- “Incoming orders have definitely slowed down. Several orders we expected to see are currently on hold. Hopefully something will break or the 4th quarter is going to look sad”;
- “It looks as if manufacturing is showing signs of slowing down”; and
- “There may be a little softening coming but it’s too early to tell.”
While the headline number is better than expected, which is getting equities going today along with quarter end window dressing, the key perceived positive is a drawdown in inventories. This suggests that there could be some inventory building in the coming months, which would drive overall economic activity. That said, the last time we saw the inventory reading drop precipitously was June 2010 when the reading dropped from 54.2 in May 2010 to 47.2 in June 2010. In the ensuing months, not only did we not see economic activity pick up, more broadly Chicago PMI actually began to decline into August 2010.
Suffice it to say, we don’t find today’s Chicago PMI all that exciting. In fact, we actually find the drop in orders to below 50 outright concerning, along with the selected commentary. As a result, we are using the over reaction of both the equity and bond markets today to add to our short positions in the SP500 and long position in U.S. Treasuries. Short high, buy low.
Daryl G. Jones