Chicago Purchasing Managers' Index unexpectedly falls

A measure of U.S. business activity unexpectedly shrank in September, indicating companies are likely to limit spending and production.

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 46.1, worse than the lowest estimate of economists surveyed by Bloomberg News, from 50 in August. Readings below 50 signal contraction.

Near-record excess capacity and gains in spending induced almost solely by government stimulus programs are likely to prevent companies from ramping up assembly lines. The manufacturing recovery may be uneven as federal assistance begins to wind down.

"Conditions are still very sobering," said Ellen Zentner, a senior macro economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "There's always a payback period on the other side for government stimulus."

Stocks dropped after the report, erasing earlier gains. The Standard & Poor's 500 Index was down 1.2 percent to 1,047.57 at 10:00 a.m. in New York. Treasury securities were little changed.

Economists forecast the gauge would rise to 52, according to the median of 61 projections in a Bloomberg News survey. Estimates ranged from 49.5 to 55.

Other reports today showed the economy contracted less than anticipated in the second quarter and companies cut payrolls in September.

National Manufacturing

Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy.

The national Institute for Supply Management, which is not affiliated with the Chicago group, is scheduled to release its September factory report tomorrow. According to a Bloomberg survey, that measure will show manufacturing expanded at the fastest rate in more than three years.

Earlier reports this month suggested manufacturing expanded at a faster pace. The Federal Reserve Bank of Philadelphia's economic gauge rose to the highest since June 2007, and the New York Fed's measure increased to an almost two-year high.

The Chicago report's orders index dropped to 46.3 from 52.5 in August and the production measure fell to 47.2 from 52.9.

The employment gauge increased to 38.8 from 38.7. A measure of prices paid for raw materials climbed to 51.3 from 50 last month.

Auto Industry

The decline in the Chicago measure runs counter to expectations that a pickup in the auto industry would lift the region. Carmakers including General Motors Co. and Ford Motor Co. plan to boost output through the second half of the year to rebuild depleted inventories. The government's $3 billion cash- for-clunkers incentive to trade in gas-guzzlers for more fuel- efficient vehicles lifted auto sales and production last month.

GM will add a third shift at three U.S. plants that are taking on additional production from factories slated to close or be idled. The facilities getting the new shifts are in Fairfax, Kansas; Fort Wayne, Indiana; and Delta Township, Michigan, GM said last week. The changes will restore 2,400 jobs, the Detroit-based company said.

"This is a really good day for GM employees," Tim Lee, the company's vice president of global manufacturing, said during a Sept. 22 conference call. An additional 600 jobs will be restored at stamping and powertrain facilities, he said.

'Cash for Clunkers'

The clunkers program offered auto buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles.

Smaller inventories may contribute to a rebound in output this quarter and next as companies restock shelves. Stockpiles dropped at a record $160.2 bilion annual rate in the second quarter, the Commerce Department said earlier today. They dropped at $113.9 billion pace in the first three months of the year.

The economy shrank at a 0.7 percent annual rate from April through June, less than the median estimate of economists surveyed by Bloomberg, today's Commerce Department report showed.

Another report today showed companies cut an estimated 254,000 jobs this month, more than forecast. The drop, which was the smallest since July 2008, compares with a revised 277,000 decline the prior month, figures from ADP Employer Services showed.

Expansion Resumes

Economists surveyed at the beginning of this month forecast the economy grew at a 2.9 percent annual pace this quarter, the first positive result in more than a year, and will expand 2.4 percent rate for all of 2010.

A drop in orders for durable goods orders in August is a reminder that companies are cautious about the recovery.

"As we look at the economic data, it's certainly encouraging," DuPont Co. Chairman Charles O. Holliday said in an interview on Sept. 23.

Even so, because of the global nature of the recession and it's "sudden" collapse last year "I think we must keep focusing on the fundamentals and not get ahead of ourselves to build inventory too fast or assume we're going to come out in a rapid-fire order."

DuPont is the third-largest U.S. chemical maker.