The Chicago Purchasing Managers’ Index (PMI) had been steadily accelerating in 2017, and it reached a three-year high in June with its reading of 65.7. The July report confirmed some of the other regional economic reports with a weaker reading of 58.9. This is a regional barometer only, but many economists and investors use the Chicago PMI to benchmark that national Institute for Supply Management (ISM) and PMI reports for the manufacturing and services segments of the economy.

First and foremost, the Chicago PMI reading of 58.9 was already expected to drop, but the Bloomberg consensus estimate was expecting the July reading to fall to only 61.0. Reuters had its poll consensus reading pegged at 60.0.

Economists and investors rarely expect economic growth readings to keep ticking higher, but the release showed that this was the lowest level in three months, even if it was the seventh in a row above the 50.0 mark.

According to the ISM, July’s result means sentiment must average 62.2 in August and September for the third quarter to come in flat on the second quarter. It was further noted that the drop in sentiment was broad-based in July across both demand and output.

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Specific points in the report were noted as follows:

• New orders fell by 11.6 points to 60.3, the lowest level since February.
• Production fell 6.9 points to 60.8, the lowest since April.
• Order backlogs fell 4.9 points, from June’s 23-year high to 57.9 in July.
• Suppliers/deliveries fell to 61.5 in July from 62.8 in June, its first drop in five months.
• The inventories indicator rose by 3.0 points to 54.9 in July, its highest reading in two months.
• The employment indicator fell another 4.0 points to 52.6, the lowest since March (but marginally above its 12-month average of 52.1).

It was just last week that we noted how the Fed’s 2.0% to 2.5% inflation target has been more of a cap rather than a floor, with disappointing evidence of inflation to keep supporting higher interest rates. This report, again just for Chicago, contradicts the weaker inflation. The ISM noted that prices had eased in the second quarter but it saw inflationary pressures at the factory level pick up in July. The prices index indicator rose 3.4 points to 60.9 in July, and that was its highest level in three months.

This month’s special question asked firms how wages across their business had changed over the past year. The ISM showed that over 70% of the firms had increased employees’ nominal pay, and only about a quarter had kept wages unchanged. The remaining 3% of firms lowered wages to some extent. The ISM report said:

Of those that afforded wage rises to their employees, just under 40% increased wages by 1% to 2%, with just shy of 30% of firms offering a more generous 3% to 4% hike. Precisely 1.7% of businesses upped nominal wages by 1% while an equal proportion opted for the other extreme, raising wages by 5% to 6%.

While investors know that there is not always a direct correlation between this report and the national readings as a whole, they also have to contend with the notion that this report can be very volatile even if economic fluctuations nationally are not. The Chicago PMI tracks both the manufacturing sector and the nonmanufacturing sector of the Chicago-area economy.

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