–Despite April Setbacks, Expansion Trend Survives

By Denny Gulino and Alyce Andres-Frantz

CHICAGO (MNI) – The MNI Chicago Report in April dropped to only 6.2
points above the break-even point, falling to 56.2, the lowest level in
29 months, pulled down by a steep decline in production and a second
monthly setback in new orders.

The April Chicago Business Barometer’s 56.2 was a six-point decline
from 62.2 the previous month, which was down 1.8 points from February.
But by remaining above the 50 point mark, April became the 31st
consecutive month of expansion.

The overall setback reported Monday, deeper than last year’s
mid-point sag, followed five months in which the composite Barometer was
above 60. It appeared to reflect heightened concern among purchasing
managers beyond the caution shown in March.

Nevertheless, expansion continued to prevail, and purchasing
managers on the ISM-Chicago survey committee generally continued to
look forward to a busy summer.

Production saw an 11.5 point drop, its biggest in 11 months, to
57.1. New Orders was off 5.9 points in April to 57.4, an 11-month low,
after also falling 5.9 points in March.

Supplier deliveries slipped 2.2 points to 55.6, the fastest
delivery time since September.

Despite the Production and New Orders declines, which together make
up 60% of the composite Barometer, Order Backlogs held its strength at
56.8, up 2.5 points in April. That was in the general range of the last
year and a half and above the median of the 10 years through 2011.

The Employment index also improved slightly, rising 2.4 points to
58.7 in the latest month.

Elsewhere in the report, Prices Paid backed off somewhat, losing
1.5 points to 68.6. That index spent the first eight months of last year
above 70 to where it returned in March, at 70.1.

Inventory accumulation narrowed to fewer firms, with the
Inventories index off 3.5 points in April to 53.9, partially retracing a
large gain in March.

Among buying policy indicators, the lead time for Production
Materiel purchases contracted by 16.3 days, an exceptionally large
monthly change and came after three months above 40. Capital equipment
purchases slipped 6.9 days to a low for the year, 111.3.

“Storm clouds are building,” Chicago Report founder Jack Bishop
said. The April plunge in production “by itself might have been a fluke,
but with new orders down two months in a row, it fits.”

“New orders have been following a general pattern of two months
down and one up, and only last fall did we miss one step in that
pattern,” Bishop said. “This month’s move is consistent with that
pattern, but this month, in tandem with the drop in production, is very
worrisome.”

But, Bishop noted that in early 2011 Production and New Orders each
fell sharply in March, April and May only to bounce sharply in June.

He also explained that the report captures the breadth of change,
not its depth, and spreading caution has slowed but not stopped growth.
In fact the Barometer has remained in expansion mode since October 2009.

On Production, which remains above 50, “It’s an 11-point reduction
in the proportion of respondents reporting expanding economic activity,”
he said.

Bishop noted, in Supplier Deliveries, what may be “a kink in
the supply chain” that has buyers spending more time lining up
foreign suppliers who can deliver faster.

Survey respondents comments seemed to mostly ignore the setbacks
and look at signs of a sustaining recovery. “New orders down a little
this month but testing and quoting is up,” one respondent noted in a
survey response. “We are expecting a lot of orders in the near future.”

On the supply environment, another respondent noted, “Tight
inventories at suppliers continue to constrain inventory turn
improvements by increasing the risk of spike-induced outages.” Offshore
suppliers can fail to keep up the pace and “apron strings are much
harder to cut than originally anticipated.”

Another included the comment, “Generally seeing a positive trend in
orders.”

Not all comments were positive, with one saying, “Despite all of
the rhetoric to the contrary, it looks like the air got let out of the
balloon.” Another said the “high cost of oil is creating a cost burden
for inbound freight and higher material conversion costs.”

The composite Business Barometer index is derived from five
weighted indices: Production, New Orders, Order Backlogs, Employment and
Supplier Deliveries, with New Orders making up a little more than a
third, and is seasonally adjusted.

** MNI Chicago Bureau: 708-784-1849 **

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