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Chicago Business Activity Contracted at Fastest Pace in December

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Chicago PMI fell to 42.9 in December

With a sharp fall in new orders, the Chicago PMI (purchasing managers’ Index) fell 5.8 points to 42.9 in December, as compared to 48.7 in November 2015. The reading is far below the neutral level of 50.0 and led to a 1% fall in the SPDR Dow Jones Industrial Average ETF (DIA) on December 31. DIA fell 2.7% in December.

Philip Uglow, chief economist of MNI Indicators, said in a press release, “The steepness of the decline in the Barometer in recent months ends a particularly volatile year, which has seen orders and output move in and out of contraction. It lends weight to the Fed’s gradual approach to tightening, with the flexibility to change direction if needed.”

The Industrial Select Sector SPDR Fund (XLI) fell 0.73% on December 31. XLI has fallen 3.6% over the past month. Industrial stocks such as 3M Company (MMM), The Boeing Company (BA), and Honeywell International (HON) fell 4.0%, 2.1%, and 0.56%, respectively, in December.

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Decline in backlog orders drags business activity down in December

The decrease in backlog orders by 17.2 points led to the sharp drop in business activity in December. Backlog orders have contracted for 11 consecutive months and came in at 29.4 in December.

With ongoing weakness in demand, new orders and production contracted further in December. Also, employment fell below the neutral mark of 50 in December.

Only supplier deliveries saw expansion in December to 56.5 points, mainly due to an issue with logistics rather than a rise in demand.

After surging in October, the Chicago PMI unexpectedly fell in November and December. The reading below the neutral level of 50 suggests contraction in the economy. With the decline in new orders, production activity may slow down and manufacturers may not undertake capital spending in the economy. The overall growth outlook has turned pessimistic with the sluggish economic growth.

In the next part of this series, we’ll see how Chinese manufacturing is trending.

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