Chicago PMI increases in December, topping expectations again
Business activity in the heavily industrialized Chicago area expanded in December, topping economists' expectations for the second straight month, according to a report released Friday.
NAPM Chicago said its business barometer, commonly referred to as Chicago PMI, stood at 56.6 in December, compared with the previous month's 52.9. Analysts surveyed by Dow Jones Newswires had, on average, pegged the December reading at 52. Readings above 50 signal expansion of economic activity.
NAPM Chicago said that "while the overall trend of the Business Barometer continues to document a softening economy, the strength of the November-December reports provides support for a 'soft-landing' scenario."
Despite the increase in the headline number, the production component of the index fell to 55.4 from 57.4 in November, while employment dropped to 49 from 54.4. The prices paid category, a gauge of inflation, fell to 63.8 from 76.2, showing that price pressures are still prevalent but not as widespread as they were in November.
The Chicago report comes at a time when investors are worried about other recent data signaling an economic slowdown. In particular, analysts point to reports released Thursday showing surprisingly weak orders for durable goods, up just 0.1 percent in November. Also, the Labor Department said Thursday that the number of workers drawing unemployment benefits for more than one week jumped by 75,000 to about 2.7 million for the week ending Dec. 15.
Shortly after the Chicago data was released, the U.S. Commerce Department announced that sales of single-family homes decreased by 9 percent last month to a seasonally adjusted rate of 647,000. It marked the largest year-over-year drop in new-home sales in nearly 17 years.
The recent data combined with geopolitical tensions surrounding the assassination of Pakistan opposition leader Benazir Bhutto prompted investors to raise expectations for the Federal Open Market Committee to continue reducing the benchmark federal funds rate from the current 4.25 percent at its next meeting on Jan. 29-30.
The Chicago business barometer is often looked to as a potential indicator of nationwide economic activity ahead of the monthly manufacturing index released by the Institute for Supply Management. The December ISM manufacturing index is due for release next Wednesday.
According to the report Friday, the number of companies reporting increased production continued to expand in December, "but were swamped by those reporting lower levels of activity than in November."
However, new orders and order backlogs both rose significantly in December, providing indications of possible future expansion, NAPM Chicago noted. The new orders component rose to 58.4 from 53.9, while order backlogs jumped to 60.7 from 45.9.
The inventories component of the index was 44 in December versus 47.1 the month before. NAPM-Chicago said the continued inventory contraction remains both good and bad news, as it's unclear whether inventories contracted because the rate of sales was greater than production or were the result of the belief that business will slow in the near term.
"A theme for the December report, similar to the November report, could be normalcy, since individual indexes were unspectacular," NAPM-Chicago said, noting that "the December measure of the economy is a modest roll-back in the cloud cover, at least for the month."