Purchasing index rises, but still indicates a contraction

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A business news professional once remarked, "I don't care what an analyst says, just as long as it makes sense." Well, economists at the National Association of Purchasing Management-Chicago are making sense, but unfortunately it's not good news for the U.S. economy.

The NAPM-Chicago announced Friday that its business index, which measures manufacturing and non-manufacturing activity in the Chicago region, rose to just slightly this month, to 34.2 from 33.3 in January. A Bloomberg News survey had expected the index to fall to 33 in February. Readings above 50 indicate expansion; below 50, contraction. Hence, the index remains well below expansion levels -- which is bearish for U.S. stock markets.

Economic Analysis: The NAPM-Chicago index has been below 50 for five consecutive months, which points to the pronounced recession that one can also see in GDP (which declined at a -6.4% annualized rate in Q4 2008) and job layoffs (which have totaled more than 3.5 million since the recession started in December 2007). The index's steep decline has been recent, paralleling the start of the financial crisis. That suggests, along with slackening demand in the Chicago region, an inability by businesses to secure adequate credit.

Further, though the index edged up in February, we'll need to see at least a three to four month uptrend and a rise over 50 to suggest that the U.S. recession has bottomed and a recovery is underway. Based on NAPM and other key metrics, that bottom is not close.

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