August Chicago PMI

Updated 31-Aug-10 10:21 ET

About this release

Highlights

The Chicago Purchasing Managers Index from Kingsbury International, Ltd., softened from 62.3 to 56.7 in August as the general manufacturing slowdown finally came to the Chicago region.
The Briefing.com consensus called for the Chicago PMI to fall to 57.0.

Key Factors

Despite the deceleration in the Chicago region, there is still nothing in the data that changes our view on the manufacturing sector.
It would take another two or three months of solid deterioration in demand before manufacturing activity returns to a contraction phase. Given the historical trends in manufacturing, we do not believe this will occur. We expect the economy to continue to expand at a sluggish pace.
Like the July ISM Index, the new orders and production indexes for Chicago both slipped below 60.0 in August; however, at 55.0 and 57.6, both indexes are firmly entrenched in an expansion phase.
Order backlogs dipped slightly as the index dropped from 57.6 to 56.2, yet this is still the second strongest reading since April 2010. The strong backlog data suggests firms will continue to produce even if new orders continue to decelerate.

Big Picture

The Chicago PMI has little overall economic value, and is only watched by the financial markets because it is usually released one day in advance of the similar national ISM manufacturing survey. A significant move in this regional survey will therefore sometimes be seen as having predictive value for the ISM index.

Category	AUG	JUL	JUN	MAY	APR
Chicago PMI	56.7	62.3	59.1	59.7	63.8
New Orders	55.0	64.6	59.1	62.7	65.2
Production	57.6	65.0	64.2	61.0	63.1
Employment	55.5	56.6	54.2	49.2	57.2
Prices Paid	57.2	58.1	61.9	64.0	71.4

Release Details

Chicago PMI

Importance (A-F): The Chicago PMI merits a B.
Source: Kingsbury International, Ltd. and Institute for Supply Management - Chicago, Inc.
Release Time: Typically the last business day of the month at 9:45 ET

In Brief

There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The New York and Philadelphia Fed's surveys are the first each month followed by the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the ISM and are of little value. The purchasing managers' reports are measured like the national ISM -- 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the New York, Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark. These surveys can be of some help in forecasting the national ISM.

In Depth

The market has been bombarded with a bevy of surveys purporting to measure manufacturing activity in every nook and cranny of the country. First it was Philadelphia, then Chicago, and Detroit, Milwaukee, New York, Cincinnati, Richmond, Atlanta, Boston, and there might as well have been a Nome survey. This hodge-podge of releases is begging for someone - namely us - to come along and cut this group down to a more manageable size.

Nuts and Bolts

Let's start with the issue of what these manufacturing surveys are trying to measure and how they go about doing it. The leader of this pack of regional surveys is the ISM index which comes from the Institute for Supply Management (formerly the National Association of Purchasing Managers). It has been around since 1931 (1948 on an uninterrupted basis), it is national, and it is one of the most timely measures of manufacturing activity available. In other words, it sets the standards by which its progeny are measured.

The ISM index is actually a composite of five sub-indexes - new orders, production, supplier deliveries, inventories, and employment. In surveying over 300 companies each month, the ISM asks for positive, negative, or unchanged readings on each of these indicators. The positive responses are added to one half of the unchanged responses to produce the diffusion index. For example, if 50% of respondents reported stronger orders, 40% reported weaker, and 10% unchanged, the diffusion index for orders would be 55%, the 50% positive plus half of the 10% unchanged. To calculate the total index, the ISM uses weights for the five indicators, which are as follows: 30% new orders, 25% production, 20% employment, 15% supplier deliveries, and 10% inventories.

The Selection Criteria

Since this methodology has made the ISM index one of the better leading indicators of economic activity over the years, we will measure the usefulness of the regional indexes based on their ability to help in forecasting the national index. In our effort to arrive at the most important regional indices, these criteria make eliminating most of the candidates easy for one simple reason - they are released after the national index. While regional economic developments are of interest to those who live in the region, they are not particularly important to the markets. If a region cannot help in forecasting national trends, then its data are not particularly useful. So say adios to Atlanta, Richmond, Kansas City, and who knows how many others which have cropped up in recent years.

And the Winner Is...

Let's focus on the regional surveys which precede the release of the national index on the first business day of each month (with data for the prior month). The contestants are Philadelphia, Chicago, Milwaukee, Detroit, New York, and the most recent addition to the bunch - the APICS survey. We looked at the correlation of all of these indexes to the national ISM and found substantial differences in their forecasting ability. The winners is...drum roll please...Chicago. The Chicago PMI index, which is released on the last business day of the month (with data for the same month), has an impressive 91% correlation with the national ISM.

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