–Biz Activity, Production, Orders, Backlog Hit 32-Month Low
–Three-Month Moving Avg on Barometer; All Biz Activity Indexes Down
–Rise In Supplier Deliveries/Buying Policies Inconsistent

By Alyce Andres-Frantz

CHICAGO, May 31 (MNI) – The MNI Chicago Business Barometer Thursday
fell for a third month, down 3.5 points to a seasonally adjusted 52.7 in
May, its lowest since September 2009.

The three-month moving average on the MNI Chicago Business
Barometer and all seven of its Business Activity measures sent negative
signals in May, six of them with outright declines, a combination that
is associated with recessions.

Jack Bishop, the original developer of the MNI Chicago Report, said
of the results, “Either three consecutive declines in the Chicago
Business Barometer or three consecutive declines in its three-month
moving average are associated with the beginnings of the last seven
national recessions, with a variable lead (time) centered on some six to
eight months.

“The third month is a key trigger point,” Bishop said. At 64
points, the Barometer “hit an apparent peak in February,” which he said
“was a critical month.”

In the last 1-1/2 years, the Barometer has been up two or three
months in a row, then down one or two, so “We needed a bounce,” in May.
Instead, he said, “Rather than neutralize the results of March and
April, the May report pressed on down.”

That does not bode well for the coming months. “The signal has been
set. So even if the report bounced back in June, it will take a while
for the signal to dissipate,” Bishop said.

May’s report reflected a 7.1 point deceleration in Production, on
the heels of an 11.5 drop in the prior month. The decline put Production
at neutral 50.0, its lowest since September 2009. The Employment Index
fell 1.6 points to 57.0.

“I did not expect Employment to fall despite weakness in the rest
of the report. Hiring plans are already in place and it takes a while to
stop that train,” Bishop said of the coincident indicator. “I would
expect weakness to show up over the next few months.”

New Orders dropped 4.5 points to 52.9 in May, having fallen 5.9
points in each of the previous two months. Order Backlogs moved into
contraction at 46.3, down 10.5 for the month, to its lowest reading
since October 2009.

After shrinking in seven of the last eight months, Inventories
finally fell into contraction at 49.4, down 4.5 points on the month. The
Prices Paid Index backed off 8.2 to 60.4, its lowest since September
2010.

“Based on Prices Paid, it looked like we had a boomlet in February,
March and April allowing either passing through increased costs or
widening margins. This appears to have slowed in April, consistent with
softer demand,” Bishop said.

The only Business Activity measure to expand was the Supplier
Delivery index, up 0.6 to 56.2.

“Production stalling at dead even was the most troubling,
reinforced by a significant drop in the number of firms reporting higher
Prices Paid,” Bishop said.

The rather somber report “told a consistent story of an economy
that is slumping.” In fact, Bishop was hard pressed to think of a bright
spot in the report beyond the increase in Supplier Deliveries and the
associated Buying Policy lead-times, both of which could be due to kinks
in extended supply chains.

Buying Policy indices uniformly increased with Production Materiel
and MRO Supplies seeing statistically significant lengthening. MRO
Supplies lengthened 4.4 days to 15.5, its longest since December 2010.

“Normally, lengthening lead times would be a sign of demand, so
that is the part that is inconsistent with the rest of the report,”
Bishop said.

“Purchasing managers are in a conundrum,” Bishop said, questioning
how far out can they commit and at what point they start to cancel or
scale-back orders “especially since Production has taken two big hits in
April and May.”

But, Bishop noted that “Business and government decision makers’
reactions can either make such a signal of current or impending slowdown
a self-fulfilling or self-defeating prophecy.”

While data can forecast recessions, subsequent factors such as
government, business or consumer action can have the potential to
reinforce or blunt such forecast trends.

Bishop said, “The longer and more complicated the supply chains get
makes reversing current trends more difficult. For instance, a further
drop in June in Order Backlogs will confirm the current signals showing
orders have been cancelled or worked down.

In the “From the Source” section of the report, survey panelists’
comments reflected a mixed picture. Some wrote of uncertain economic
times, volatility and raw materials pricing as having a significant
impact on their ability to compete, reinvest and grow their business but
others remained optimistic based on potential business in the pipeline.

One said, “Our orders are staying pretty steady, but our backlog
only takes us through the end of June,” while another commented,
“Business is slowing down right now. We had a decent first quarter but
its gotten quiet.”

Yet another lamented that, “A decrease in order intake and backlog
over the past three months has caused our first workforce reductions
since the Carter years.”

Others reported a pickup in business opportunities but noted
ongoing financial stresses on small businesses.

However, another said, “China inflation is kicking in for our
business starting in the second quarter. Canadian business is flat but
U.S. seems solid.”

“New orders have slowed but outlook remains good because of quote
volume and size of projects being quoted,” another panelist said.

–email: aandres@marketnews.com

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

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