Chicago PMI falls into contraction in June

The numbers: A measure of business conditions in the Chicago region fell in June into contraction territory for the first time since January 2017. The Chicago PMI business barometer declined to 49.7 in June from 54.2 in May, MNI Indicators said Friday. Any reading below 50 indicates contracting conditions. The index had been as high as 64.7 just four months ago.

What happened: Four out of the five subcomponents declined in June. The only gain came in hiring. Amid weak demand, firms slowed production to a three-year low. Businesses also continue to accumulate inventory. There were anecdotal reports of tariffs leading to higher prices.

The survey’s special question asked firms about the impact of trade tariffs on their business. About 80% of firms said that they were negatively impacted, with tariffs raising prices on their goods leading to a pullback in orders.

Big picture: Economists use the Chicago PMI and other regional indicators to gauge the health of the national Institute for Supply Management manufacturing index. That report, due Monday, is expected to be lower than the 52.1 reading in May. Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said he thought the ISM index would remain above 50.

What are they saying: With customers rethinking their purchases, demand tumbled, and consequently firms pulled back production, weakening overall business sentiment, said Shaily Mittal, senior economist at MNI. “In coming months, our survey will provide further evidence as to whether the diminished business confidence is temporary amid tariffs woes or more structural calling for some counter measures,” she said.

Market reaction: Stocks were higher as investors await President Donald Trump’s meeting with Chinese President Xi Jinping that will take place on Saturday in Osaka, Japan. The Dow Jones Industrial Average DJIA, +0.35% was up 50 points to 26,575. The index is on pace for its best June since 1938.

Source: Marketwatch.com

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