Chicago is back in contraction

MNI Indicators

Business activity in Chicago is back in contraction. 

The MNI business barometer, also known as the purchasing manager's index, fell to 49.3 from 50.4 in the prior month where it was expected. It climbed out of contractionary territory — below 50 — in February, but has returned for the sixth time in the past year. 

A 6.6-point drop in the production component was the big reason why the overall index declined. New orders also fell below the threshold of 50 and to the lowest level since December 2015 as backlogs rose. 

Employment stayed in contraction.

"While expectations are that growth in the US economy will bounce back in Q2, the evidence from the MNI Chicago Report shows activity weakening from an already low level," said Philip Uglow, chief economist of MNI Indicators. 

Bank of America Merrill Lynch economists had forecast a return to contraction.

"Other regional surveys suggest broad weakening in manufacturing conditions, driven in part by a decline in new orders," they wrote in a preview. "The new orders component has a higher weight in the Chicago PMI, suggesting even greater downside."

The national ISM manufacturing index for May will be released on Wednesday, and is expected at 50.4.

But this Chicago report raises the risk that it will slump below 50, according to Pantheon Macroeconomics' Ian Shepherdson in a note.

If that happens, it is unlikely to throw the Federal Reserve off its consideration for a rate hike in June, as manufacturing is now a smaller contributor to economic growth, he said. Also, the sector's headwinds including the strong dollar and low energy prices have been gains for consumers.

The Fed went ahead in December after three straight readings below 50, Shepherdson noted. 

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