Chicago PMI contracts for a fifth consecutive month; CB consumer confidence flashes recession

The Chicago Purchasing Manager’s Index (PMI), an index of the strength of manufacturing firms based in the Chicago area, saw declines in January 2023 settling at 44.3, from 44.9 in December 2022.

A reading under 50 signals a contraction, while above 50 marks an expansion.

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This was the fifth consecutive contraction for the index, which underperformed market estimates of 45.0, indicating a slowdown in the sector and a gloomy outlook amid recessionary concerns.

The employment sub-category slipped by -0.6 to 42.0 confirming the deepening labour shortage, which exacerbated delays and lowered firm output. A quarter of the surveyed firms reported lower headcounts in January.

Production improved considerably by 8.5 points to 48.6. However, the continued contraction was a result of labour shortages and disruptions due to the harsh winter climate.

New orders disappointed too, slipping 2.7 points to 40.6, driven down by weak consumer sentiment.

Despite the improvement in backlogs in December 2022, January 2023 witnessed a deep contraction to 35.5, falling by -19.2 points.

Only sub-indicators for supplier deliveries and prices paid were in expansionary territory, at 54.9 and 72.5, respectively.

The improvement in prices paid came after five consecutive months of declines and was supported by higher input costs such as steel.

Conference Board (CB) consumer confidence index

Like the Chicago PMI, the CB consumer confidence index underperformed market expectations of 109.0, coming in at 107.1 during January 2023.

The overall index declined from 108.3 in December 2022.

The Present Situation Index rose from 147.4 to 150.9 this month, with 20.2% of consumers assessing business conditions as ‘good’, and 19.2% believing them to be ‘bad’.

The Future Expectations Index declined from 83.4 in December to 77.8 in January.

Values below 80 often signal an upcoming recession within a period of six months to a year.

The Present Situation and the six-month ahead expectations indicator are now sharply divergent, suggesting that consumers are apprehensive about the business outlook.

Expectations around the job market improved, with 48.2% of respondents describing jobs as ‘plentiful’ versus 46.4% in December.

However, the short-term labour market outlook was not encouraging, with 20.1% of respondents expecting lesser jobs to be available.

The Employment Cost Index published earlier today (for which an article is available on Invezz), appears to have peaked in terms of labour costs, implying that securing fresh jobs and earning sufficient incomes, may become more challenging.  

Consumer confidence and spending may be further dampened by the squeezed savings rate, with government stimulus cheques having dried up.

Outlook

With consumer spending accounting for 70% of economic activity in the US, ongoing weakness in demand would likely lead to a recession later this year.

The Fed is widely expected to raise rates by 25bps tomorrow, further tightening monetary and business conditions, which would weigh on household budgets and demand conditions in the months ahead.