–Chicago Business Barometer -1.8 Points to 62.2
–New Orders Index -5.9 Points to 63.3; Inventories +7.8 Points to 57.4
–Prices Paid +4.5 Points to 70.1; Production +0.8 Points to 68.6

By Denny Gulino and Alyce Andres-Frantz

CHICAGO (MNI) – The MNI Chicago Report stretched into 30 months of
expansion in March, but not without a cautionary note about new orders
and inventories, while prices rose.

The March MNI Chicago Report Business Barometer fell to 62.2
seasonally adjusted from 64.0 in February, back down to the level of
December. January had gone down to 60.2.

The composite index has been above 60 for five months. Its
three-month average stayed at 62.1 for a second month, its highest since
May 2011

The report’s Production Index rose 0.8 to 68.6, the highest since
April 2011’s 69.7.

Yet what stood out was a trio of indicators that did not travel in
an unambiguously positive direction and, in fact, could be a “wake-up
call,” according to the founder of the Chicago Report, Jack Bishop.

The New Orders index declined 5.9 points after a sizable January
increase while the Inventories Index rose 7.8 points, its biggest
expansion since December 2010 after five months of contraction.

The rise in the Inventories Index was to highest level since
September 2011 when it was 58.7.

The new orders softening was accompanied by a relatively big jump
for the inflation indicator. The Prices Paid Index was up 4.5 points to
70.1, the most it’s gone up in 15 months — to its highest level since
August.

“New orders contracted back to the level of two months ago, if only
modestly so” Bishop said. “More troubling, inventories took a solid jump
and it is just possible management overall was a little surprised by the
contraction in new orders.”

Order backlogs improved some more after its below-50 reading in
January, one of only two monthly excursions below 50 since the beginning
of 2010.

Elsewhere in the report, the Employment Index backed down, but not
as much as it had gone up in February. At 56.3, that index was down 7.9
points from February, but February had been up 9.5 points from January.

“The drop in the Employment Index, slowing its expansion, is
consistent with management using a hair-trigger when dealing with
staffing levels,” Bishop said.

Supplier deliveries edged up a tenth to 57.8, basically in much the
same neighborhood it’s been in since late 2009, when it recovered from
its six-month dip into the 40s.

The report also showed a continued lengthening in the buying policy
that measures the difficulty or ease of procurement. The Production
Materiel measure of how far in advance to buy reached 45.2 days. That is
a historically high figure, seldom approached in the index going back to
its inception in the 1970s. As recently as December it had been as short
as 29.1 days.

“The longer lead times for Production Materiel is a further
disquieting event, challenging the supply-chain management to do with
longer lead times combined with every more broadly rising prices and
falling demand,” Bishop said.

“If you’re sitting there as a purchasing manager, and looking at
how much you need to buy and when to place orders, with this kind of
data, you’d be thinking about placing larger orders sooner,” Bishop
said.

When orders back off, it sometimes is a symptom of an “order trap,”
when aggressive salesmanship can’t push goods into the pipeline to the
same extent. “All of a sudden those orders disappear,” something that
happens “every so often,” he said.

Meanwhile, inventories keep building and “the problem with
inventories is once you build, you have to run it off,” Bishop said.

The report showed capital equipment procurement lead time up a
little more, to 118.2 days, which is back to October’s level.

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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