Chicago PMI A Step Backward

The Chicago Purchasing Managers Index (PMI) — one of the precursors to the ISM reports that will be released tomorrow (manufacturing) and next week (services) — fell to 46.1% in September from 50.0% in August. The report covers both manufacturing and service businesses.

The magic number separating expansion from contraction is 50.0%. The Chicago report is a big disappointment after similar readings from the New York and Philadelphia regions showed unexpected improvements. The consensus expectation was that the Chicago reading would come in at 52.0%.

This puts the current expectations that the ISM manufacturing number will come in at 54.0 in substantial doubt. In August the reading was 52.9, and that was a key piece of evidence that the economy was on the mend. I did not see what the expectations are for the services number, and lately manufacturing has been doing better than services.

If the overall ISM follows Chicago rather than the New York or Philly numbers, it will be a major blow to investor confidence that the worst is indeed behind us. This would particularly hurt cyclical companies.

Some of the manufacturing firms that have major operations in the Chicago Federal Reserve district include Caterpillar (CAT), Joy Global (JOYG) and Ford (F). However, from the report I do not know if those firms were actually the cause of the problems.

The market did not like this report and fell very sharply after being up early, following a much-better-than-expected revision to second-quarter GDP.

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