31 August 2009 at 15:47 GMT
The Chicago Purchasing Managers’ Index came out better than expected at 50.0. The consensus of expectations was for an index of 48.0 while last month’s release came out at 43.4. Today’s number is a significant improvement from the last couple of months.
The market is not giving to much importance to the release, but which is probably because the PMI number is released one day before the national ISM manufacturing index and these two series sport a very high correlation. Today’s number in other words could signal a better than expected in the overall ISM index tomorrow. ISM manufacturing will be out at 14:00 GMT tomorrow.
The S&P gained a couple of points before the public release, but soon dropped back below pre-release levels while the EURUSD is basically unchanged at the moment.
The Chicago PMI is supposed to give a first impression of the economy as purchasing managers are assumed to be especially well-informed about where the economy is headed.
The Chicago PMI is a diffusion index where a number above 50 indicates expansion while a number below 50 indicates contraction. Today’s reading is the first at or above 50 since September 2008 and is an early indicator that the economy is not contracting anymore.
Digging deeper into the numbers it is important to note that the component new orders are above threshold value of 50. New orders, which can be used as an early indication of where the economy will be going forward, is 52.5 after months below the threshold value. Conditions for new orders are thus expanding for the first time in many months.
Inventories, however, only rose slightly to 27.5, which does not lend credibility to the story that third quarter US GDP growth will be positive, with inventory the main driver alongside Government spending.
Prices paid came out at 50, which could signal that the deflationary pressure is not getting any greater, but isn’t easing either. It is however a significant improvement month-on-month and could be an early indication that PPI released later this month will not decline further month to month.
Generally the report is positive with all components rising.
Nevertheless order backlogs, inventories, and employment are still below 50 while prices paid as mentioned came out at 50.