Via Millan Mulraine at TDSecurities:
The disappointing performance in the Chicago PMI report has injected some concern that the US economic recovery may still be struggling to move beyond the Q1 soft-patch, and the weak tone suggests the the drag on growth may have extended beyond the temporary impact from the bad weather and East Coast port shutdown. In May, the headline Chicago PMI index dipped back into contractionary territory, falling to 46.2 from 52.3 the month before. On an ISM-weighted basis, the index also dropped back in negative territory, falling to 48.8 from 53.6. To be sure, this index is generally volatile and tends to exaggerate underlying economic momentum at the best of times, however, the sluggish trend over the past few months offers some caution about the consensus narrative for a rebound from the Q1 soft patch.
The tone of the report were unambiguous weak, with no redeeming qualities in the details. In particular, beyond the drop in the production index (from 52.7 to 45.8), the weakness in the key forward looking indicators such as new orders (down from 55.1 to 47.5), order backlog (from 48.5 to 47.3) and employment (from 54.0 to 48.0) suggests that the outlook for the recovery remains quite weak. The new orders to inventory spread, which is generally a very good indication of future production activity also plunged well into contractionary territory to -5.8 from 0.9, suggesting further downside risks to production ahead.
Notwithstanding our inclination to take this report with a grain of salt, we have nonetheless taken note of the disturbing trend that is beginning to emerge in this index. As such, we are inclined to highlight some downside risks to our call for a rise in the ISM manufacturing index to 52.2 from 51.5 – which will be further indication of a sub-par rebound in growth in Q2.