Chicago PMI unexpectedly drops in January

Economic activity in the Chicago area unexpectedly deteriorated in January.

The Chicago Purchasing Managers’ index fell to 50.3 from a previously-revised 53.9 in December, marking its lowest level since May 2016 and missing expectations for an increase to 55.0.

Three of the five components of the barometer decreased, with only order backlogs and supplier deliveries recording gains in January. New orders fell by 7.8 points, slipping into contraction territory, to the lowest level since December 2015. Meanwhile, growth in production also eased, down 2.3 points to 56.0.

Order backlogs rose but remained in contraction territory, while employment remained below the break-even level for the third straight month.

Shaily Mittal, senior economist at MNI Indicators, said: “Business activity in the New Year got off to a slow start with contracting orders and easing production weighing heavily on hiring intentions. Activity in Q1 is usually weaker due to seasonal factors, so the following surveys will provide a better picture of business performance.

“Respondents to our survey did not expect to be affected by rate increases by the Fed in 2017. Although cost of capital is expected to increase, firms seemed to have already factored this into their purchase decisions.”

Pantheon Macroeconomics said: “We expected the index to dip a bit, but this is a sharper fall than we anticipated. But the Chicago PMI is uniquely sensitive to the variations in the flow of orders for Boeing aircraft - the company is based in Chicago - so swings in the index often don't tell us anything much about the national picture. In January, both the Philly Fed and Empire State surveys strengthened, so we're sticking to our view that tomorrow's national ISM manufacturing index will nudge up a bit. Overall, we think the manufacturing sector is recovering slowly as the hit from the collapse in oil sector capex fades.”