No bottom yet: Key purchasing index falls to lowest level since 1980

Spring is a time of growth and renewal, but so far Chicago-area purchasing managers do not expect growth to resume in U.S. economy this season.

The NAPM-Chicago announced Tuesday that its business index fell to 31.4 in March from 34.2 in February. The NAPM-Chicago index is now at its lowest level since 1980. A Bloomberg News survey had expected the index to fall to 35.0 in March. Readings above 50 indicate expansion; below 50, contraction. Hence, the index remains well below expansion levels -- which is bearish for U.S. stock markets.

Investors should pay attention to the NAPM-Chicago index -- a composite index of business conditions in the Chicago area -- because it has proven to be an accurate indicator of national business activity and inflation; accordingly, the index is closely monitored by the U.S. Federal Reserve.

No recession bottom yet

Economist Richard Felson told Daily Finance Tuesday that the March NAPM-Chicago reading, combined with weak employment and housing data, means that those who argue that the U.S. recession is likely to bottom by the end of Q3 may be stretching their point.

"There's little in home price or manufacturing data to suggest we're nearing a bottom. Supplier deliveries, order backlogs, and prices paid are also weak, and that usually indicates the recession has not bottomed," Felson said. "At best, business-to-business demand is sluggish in some sectors, so an economic recovery before the start of Q4 would be a best-case-scenario."

Economic Analysis: The NAPM-Chicago index has been below 50 for six consecutive months, which points to the pronounced recession that one can also see in GDP (which declined at a -6.3 percent annualized rate in Q4 2008) and job layoffs (more than 4.4 million since the recession started in December 2007, 2 million in past four months). The index's step 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. True, credit conditions have improved since January, but managers will have to see increased demand before expanding operations.

Further, the nation will need to register at least a three to four month uptrend in NAPM-Chicago index and a rise over 50 to suggest that the U.S. recession has bottomed and a recovery is underway. As economist Felson noted, based on NAPM and other key metrics, that bottom is not likely to occur before Q4 2009.

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