With the release of today’s Chicago ISM Purchasing Managers Index the data continues to confirm weakness in the regional Fed Reserve manufacturing indexes. Business slowed in the Chicago area this month with the purchasers’ index coming in at 56.5, down 2.3 points from July. While the rate is still over 50, indicating expansion in the area’s economy, the trend is the more disturbing issue.
As we have stated in the past when a automobile driver slams on the brakes to prevent an accident the car doesn’t come to an immediate stop. The car rapidly SLOWS to a stop. In other words, the car decelerates to a stop. If you take a look at the overall index you can see that we recent put in the peak of the index for the current cycle earlier this year and are now decelerating.
While there was a very slight uptick in employment this month the underlying internals were not great. Overall production slowed from 64.3 to 57.8. New orders, indicative of current business conditions, as shown in the chart slowed from 59.4 to 56.9. Backlogs collapsed into contractionary territory falling from 55.7 to 49.6 which means that production in the future will slow as backlog orders are filled. Inventories declined as well.
Some of the comments from the survey were very interesting ranging from “conern over holding larger inventory” to “small business remain under a lot of stress.” In terms of employment businesses are using temporary hires to increase output but are having a lot of difficulty finding, hiring and keeping qualified machinists. This goes to the point that we have been making for a while that one of the biggest shortfalls in American today going forward will be skilled labor.
However, the one comment that screamed out at me in the report was: “The unprecedented volume of manufacturing being exported and the ‘do more with less’ company mandate continue to wear on those remaining employed. American made materials and component options becoming increasingly scarce. Logistics costs loom large.”
One of the issues going forward, as we have discussed previously, is the lack of manufacturing and production in the U.S. Lack of skilled domestic labor, high wage and benefit costs, and excessive regulations are keeping outsourcing alive and well which has a very low mulitplier effect for the U.S. economy. This will have to change if we are going to began to create strong economic growth once again in this country.