–Employment Surged 9.5 Pts; Most Since March 2008; Highest Since May’84
–But Some Slight Sign of Concern on the Far Horizon

By Denny Gulino and Alyce Andres-Frantz

CHICAGO (MNI) – Highlighted by an employment reading that reached
its highest in nearly three decades, accompanied by notable improvement
in several other indices, the February Chicago Business Barometer
Wednesday posted a 3.8 point improvement to 64.0.

February marked the 29th month of expansion for the Business
Barometer. Several of the component business activity indices also
improved in the month, including Production, New Orders and Order
Backlogs, the Institute for Supply Management – Chicago and Deutsche
Borse AG reported. Most notable was the outsized increase in the closely
watched Employment index.

The gain in the composite Business Barometer took it to its highest
level since April of last year and its three-month moving average rose a
half point to 62.1, its best reading since last May. It has been above
60 for four months and had reached its 2011 high of 69.6 in March of
last year. Any reading above 50 suggests expansion.

The Barometer is derived from monthly responses to a survey of
business activity for Employment, Production, New Orders, Order Backlogs
and Supplier Deliveries among Chicago area manufacturing and service
firms, some with international operations.

–Employment, clearly one of the most important aspects of the
report, rose 9.5 points to 64.2, its biggest gain since March 2008 and
its highest since May 1984’s 65.0. Its four-decade median level is 50.3.

Placing the February Employment index surge in context beginning
early last year, it had been above 60 January through May 2011. But it
began to back off somewhat beginning in June until it dipped to its 2011
low of 53.4 in August. That month its three-month moving average was at
its low for the year at 55.1.

Then there was some acceleration back above 60, but only for
September and October. It spent three months back into the 50s until
last month, January, it slipped back not far from the low August level,
at 54.7. Suddenly, in the latest month, it has made a 9.5 point jump.

The data shows that Employment consistently has been back and forth
for a while. Putting the Employment data together with other information
on the economy, there continues to be evidence of a reluctance to risk
accelerated hiring.

The Employment index continues to trail behind Production in 22 of
the last 24 months, supporting a notion that businesses are reluctant to
increase Employment based only on favorable month-to-month changes in
Production.

–The February Production Index rose 4 points to 67.8, highest
since April of last year, after two months of declines.

–The New Orders index rose 5.6 points in February to 69.2,
outpacing the growth in Production for the fifth out of the last six
months, January being the exception, to reach an 11-month high. Since Q2
2011, New Orders have been in a pattern of down two months then up big.
Strength in New Orders was consistent with a rebound in Order Backlogs.

–Order Backlogs rose 5.3 points to 53.6, moving back out of
contraction after January’s 9.0 decline into a contractionary reading of
48.3.

The Prices Paid index, which is consistent with production and new
orders indices, rose 3.2 to 65.6, its highest since October’s 66.9. That
reinforces the view that February’s economy was strong enough to
encourage some additional pricing power.

–Supplier Deliveries, often an inverse indicator, dropped 3.8
points to 57.7 after rising in three of the six months through February
in what has been an oscillating pattern.

Inventories, often somewhat difficult to interpret, slowed for the
fifth month, losing 2 points to edge just below the breakeven line to
49.6. Ongoing weakness in inventories expansion could be a contributor
to lower Supplier Deliveries.

Whether the growth in inventories has been curtailed by good luck,
caution or a lack of working capital, ongoing weakness in this category
can be a negative for the economy over the long run.

Despite the generally strong February numbers overall, some survey
respondents’ comments that accompanied their survey responses as well as
the slight Inventories slowdown and the slower rate of expansion of
Supplier Deliveries suggested some measure of caution is warranted about
the outlook.

Among the respondent comments, one noted that “production is down
still … . Not sure why. Think the economy has started to affect our
business.”

Another said, “We are hoping that the slowdown in new orders
experienced in December and January is over.”

Still another noted, “We are seeing pricing uptrending in motors,
plastics and rubber-related products.”

Another said, “While our business is strong now, some of our
customers are slowing down.” Another observed, “Forecasts seem to be
adjusting slightly down. We keep hearing optimism but still haven’t seen
it.”

There were more directly positive comments, such as, “Our business
continues to grow. We are expanding production area and buying new
equipment,” but, the response continued, that from a purchasing
standpoint, “Pricing is going up.”

Still another observed, “The transportation industry seems to be
improving consistently. Orders continue to be strong and folks in my
industry are hiring.”

For Jack Bishop, who originally developed the Chicago PMI report
for the Chicago Purchasing Managers Institute, the February results can
be seen as a marching band, with not all of its elements keeping up the
pace or even the same direction.

“Given the widespread, and in some cases exceptionally strong,
improvements in February, the report as a whole appears to reinforce the
tune of a continued economic recovery,” he said.

“While the February edition of The Chicago Report can be read as a
stirring Souza march, the Piccolo and the Tuba are off tempo. The
Piccolo of Supplier Deliveries is slowing while the rest of the band
picks up the pace.”

And inventories? “The tuba section of inventories is not only not
keeping up with the band, but also, after four months of dragging its
heels, Inventories turned and marched, very slowly, in the opposite
direction.” He concluded, “As usual, a sunny report is not without
clouds on the horizon.”

The monthly Chicago PMI survey also asks about the path of buying
policy and in February the lead time for Production Materiel contracted
to 40 days, back from January’s 42.2 days. That had been the longest
lead time since that index began in June 1997. But the lead time for
Capital Equipment purchases in February lengthened for a second month,
this time to 117.4 days, the most since November. MRO Supplies rose 2.2
days to 11.9 days.

The buying policies indices answer the survey question, “How far in
advance must you buy, to have when needed?” Production Materiel’s
four-decade median is 33 days. Longer lead times can be either an
indication of stronger demand, which appears to be the general context
of February’s report, or weaker supply.

“Production Materiel needed to take a breath,” Bishop said adding
that from the demand side all buying policy measures were “all
supportive of the report as a whole.”

“Capital Equipment is getting longer and longer with caution on the
side of Production and the unwillingness in commitment to capital. This
could be lack of enthusiasm to finish things off, or it could be some
kinks in the road or supply chain,” Bishop said.

The Chicago Business Barometer, as a composite of weighted raw
indices which is then seasonally adjusted, provides an overall gauge of
business activity compared to the prior month. The individual Business
Activity indices are designed to measure the direction and pervasiveness
of changes in the economy, not necessarily specify the magnitude of
change.

** Market News International Chicago Bureau: 708-784-1849 **

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