Given The Deep Drop Of Chicago PMI Into Contraction Territory, Should We Be Worried?

On Wednesday, the Institute for Supply Management (ISM) reported its Chicago PMI data and it was troubling. The index of regional manufacturing fell to a level indicative of economic contraction. It's not the first time this year for an underwater result, though we note that the economy has grown generally despite softness in this data point. Still, the depth of decline in September raises a specter of doubt about the impact of the China slowdown, European issues and U.S. energy sector woes on our economy. Whatever the cause, there may be reason for concern about the American economy, though we may have to wait for another month or two of data to determine whether that is true or not. Even so, more data is due Thursday on the American and Chinese economies that could confirm concerns and alter the path of stocks from Wednesday's appreciation to something else.

Econoday Chart from Bloomberg Economic Calendar

The ISM-Chicago Business Barometer dipped below 50.0 again, after two months of expansionary readings. The reading for September fell 5.7 points to 48.7. There is speculation as to the exact cause, but 30% of the purchasing managers surveyed said they felt it was due to China's economic woes. Another 20% blamed European issues as more important to their business falloff. Another 30% said they were unaffected by both China and Europe.

Three of the five total components of the index fell in September. Production was worst of all, falling to its lowest level since July 2009. You remember 2009, when the stock market bottomed and the great recession smothered us. Unfortunately, New Orders also fell sharply, which portends poorly for the fourth-quarter economy. Order backlogs remained in contraction for the eighth consecutive month, leading ISM to speculate that companies are probably operating below capacity. Now, the Employment component does not reflect that yet, but layoffs typically lag economic decline. The producers of this report offer another ominous message, one of disinflationary pressure. Lower prices were paid thanks to deeply decreased energy prices, but if there is pressure on prices of goods for sale, then the Fed will have to back off from its plans. It would not be something to celebrate, though, in that case.

This particular measure can fluctuate somewhat wildly, and it's important to note that it is a sentiment reading of purchasing managers, not sales data. Still, the drop into contraction territory marked the fifth time for the data point in the year, which you can see in the bars of the chart above. The third quarter marked improvement over the second quarter, thanks to July and August, but September's steep descent still raises alarm. Is China, Europe or the energy sector, or all of the above, impacting the overall economy enough at this point to make a difference? If so, the nascent market correction could evolve into a full blow bear market, and one well earned. I do not believe that is the case, but the data now has my attention.

Thursday's data could confirm our concerns, as we receive ISM's broad measure of manufacturing activity covering the entire nation. It is expected to decline to 50.5, from 51.1 last month, which would keep it in expansionary territory. However, it's important to note that economists expected the ISM-Chicago PMI data to only fall to 53.6, and it fell much further. We will also receive the PMI Manufacturing Index, which economists expect to stick at 53.0. It seems likely both of these data points will disappoint economists, which would not be good for stocks Thursday despite the gains posted on Wednesday. Doubt about the U.S. economy should intensify as a result. We will also get a PMI measure for China Thursday morning, which could make everything all the more interesting. I cover the economy and markets closely and publish regularly, and welcome relative interests to follow my column here at Seeking Alpha…

Read more »SeekingAlphaOctober 1, 2015 - 2:51 AM EDTNews by QuoteMedia