Business conditions in the Midwest deteriorated in September, resuming a ten-month contractionary trend that had been broken in August. The Chicago Business Barometer fell 3.9 points to 46.1, hurting forecasts for the nationwide survey of manufacturing conditions coming out this Friday.
The unexpected slide caused equity markets to fall more than 1% in the minutes following the release.
New orders, production, order backlogs, and supplier deliveries all fell from growth mode into contraction in the month, pushing the headline index into negative territory and halting three monthly advances.
New Orders fell to 46.3 from 52.5
Production declined to 47.2 from 52.9
Order Backlogs sunk to 36.7 from 45.8
Supplier deliveries decreased to 49.3 from 54.6.
“The drop in the Chicago index is inconsistent with the reported September gains in the New York and Philadelphia Fed surveys, but because the Chicago series is more statistically correlated with the ISM than the either of these other two surveys, we are reducing our forecast of the ISM by one point to 53.0 from 54.0 previously,” said Joseph LaVorgna, chief US economist at Deutsche Bank.
Analysts from Nomura Global Economics said the Chicago survey is “notorious for head fakes,” but they called the report “disappointing” and commented that it “reinforces” the belief for a soft figure in the ISM survey.
Other details were also unimpressive. The employment index remained steady at 38.8, indicating the jobs continue to be slashed rapidly in the Midwest. In addition, costs were increasing as the prices index crept up to 51.3.
Inventories at least improved in the month, but the 11-point jump to 38.9 still indicates that businesses are some time away from restocking in anticipation of fresh demand.
Forecasts had been looking for the index to improve by several points. Not surprisingly, the market reaction was a quick sell-off. As of 10:30, shares in the US had fallen by around 1.20% on the day, extending the modest losses from yesterday.