Chicago, ISM, Markit PMI - All Weak

Chicago, ISM, Markit PMI - Chicago PMI

In this article, I will be discussing a few relatively weak April PMIs. Chicago PMI fell from 58.7 to 52.6 which missed the consensus of 59 by a long shot. The low end of the consensus range was 57. For some reason, economists didn’t notice the Q2 slowdown that now seems apparent.

It’s very early in the quarter, but I think Q2’s GDP growth rate will be like Q1’s except without the boost from trade and inventory. The boost in inventory could have been a mistake since demand looks weak in April. The U.S. and China are still working on their trade deal. 

It might be finalized in June which is the last month of the quarter. Because of the April employment report, the Atlanta Fed Nowcast expects 1.7% GDP growth. It's up from 1.2% growth. That’s still weak. Median estimate out of 7 calculated by CNBC is for 2% growth. As of now, I see a one handle on growth.

Chicago PMI fell 7 points in March which means the 2-month decline was 13.4 points. New orders fell and production is almost at a 3 year low. Manufacturing sector hiring is at an 18 month low. The only good part of the report was the rise in backlog orders in a build. That’s consistent with the ISM report which I will review next. 

Finally, the decline in monthly prices was the biggest since December 2008. That was blamed on low steel prices. The ISM report also had its price index fall.

Big Decline In ISM PMI

As predicted by the regional Fed manufacturing reports, the ISM PMI had a big downturn. It fell from 55.3 to 52.8 which missed estimates for 55 and the low end of the estimate range which was 54.5. 

Because this index had been so strong relative to the economy, this decline only brought the PMI to the 44th percentile, using data going back to 1950. Furthermore, this PMI is consistent with GDP growth of 2.9%. It’s remarkable to see such a big decline. Yet still have a PMI consistent with GDP growth that’s likely higher than what will occur. 

All the regional Fed general business conditions indexes fell expect one. Empire Fed index rose, but the future expectations index fell. As you can see from the chart below, the ISM PMI actually fell slightly more than the average of those indexes.

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Chicago, ISM, Markit PMI - This PMI was the lowest since October 2016 

Which was when the manufacturing sector had just exited its recession. One year average PMI is 57.2. March reading of 55.3 ended up being accurate because industrial production growth ticked up. Let’s see if industrial production growth falls negative in April after this weak PMI. 

As you would assume with such a weak reading, the individual segments of the manufacturing ISM report were mostly weak. The new orders index fell 5.7 points to 51.7.

The production index fell 3.5 points to 52.3. Employment reading fell the sharpest as it went from 57.5 to 52.4. As I mentioned earlier, the prices index fell 4.3 points to 50. The biggest topic in economics has been that there is no inflation. While I contend that anytime CPI is above 0%, there is inflation, this price index agrees with those saying inflation is dead. 

Inflation is weak because of the economic slowdown. It’s not dead. It will accelerate higher late this year and into early next year when growth improves. Just like the Chicago index, the backlog of orders index was up. It went from 50.4 to 53.9.

As you would suspect with such a decline in the PMI, the comment section wasn’t very optimistic.

Big concerns were tariffs and the Mexican border issues. It’s interesting to see the stock market rally so heavily this year on a trade deal with China when tariffs are still an issue in April. I bet the traders who bought stocks in January on the prospect of a trade deal didn’t think a trade deal still wouldn’t be done by early May.

Specifically, a machinery company stated, "Raw material prices continue to come down, along with logistics costs. Suppliers continue to struggle to get [qualified workers], and the learning curve is leading to quality issues. That is impacting their ability to deliver. 

Overall, business [is] strong. Monitoring the tariffs and Mexico border issues, which are a potential threat. The China trade agreement getting completed will help with stability with suppliers and costs management." I think a trade deal will be made, but not as soon as the politicians claim. Officials are biased because they want to make what they are working on look good.

Chicago, ISM, Markit PMI - Markit PMI Improves Very Slightly

Markit PMI went from 52.4 to 52.6 which beat estimates for no change. This report is different from the ISM one in rate of change terms, but it still shows weakness. The PMI shows factory production was a drag on GDP. It fell at a lesser rate. The output PMI needs to rise above 53.5 to signal growth in the manufacturing sector.

Specifically, new business growth increased at the fastest clip in 3 months which helped output growth improve slightly. However, employment expanded at the weakest rate since June 2017. 

Input prices rose at the slowest rate since July 2017. The manufacturing sector’s growth rate was the 2nd slowest since June 2017. There was a rise in backlog growth like the other 2 reports showed. Backlogs increased at the quickest rate since last November.

Chicago, ISM, Markit PMI - Global PMI Falls Slightly

Global trade volumes have fallen 2 straight quarters for the first time since the 2008-2009 recession. April JP Morgan Manufacturing PMI was consistent with this decline as it fell from 50.5 to 50.3 which was the weakest reading since June 2016. Future output index fell from 60.2 to 59.8 which was the 4th worst reading since it started being calculated in July 2012. 

As you can see from the chart below, the Ned Davis Research recession probability model is at 96.11. When it is above 70, the global economy has been in a recession 91.77% of the time. We are in a global recession. 

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