Chicago PMI surprises to the upside; Philadelphia Fed GDPplus indicates Q4'22 recession

Chicago Purchasing Managers’ Index (PMI) is a diffusion index that incorporates results from manufacturing firms in and around the Chicago area.

A reading above fifty suggests the manufacturing sector is expanding, while a reading below fifty indicates it is in contraction.

The indicator zoomed to 48.7, well above market expectations and the previous month’s reading of 42.8, but continued to remain in contractionary territory.

Experts at Investing.com were forecasting an improvement to 44.1.

This was the first time since April 2023 that the published Chicago PMI outperformed the forecast as reported by Investing.com.

This is also the third month in a row that the index has shown successive improvements in business activity, although it has remained below 50.

The latest reading marks twelve consecutive months of negative growth, but is also the smallest such contraction since the decline began in September 2022.

The recent low was registered in November 2022 at 37.2.

The Chicago PMI can prove particularly useful in forecasting the closely watched ISM manufacturing PMI, which has also remained below 50 since November 2022.

As a result, the outlook for the manufacturing space has remained gloomy amid persistent recessionary concerns.

Are we already in a recession?

Yesterday’s GDP data for Q2 edged higher to 2.1% YoY but fell short of market expectations of 2.4% YoY.

The full story is available here.

Mike Shedlock is a highly-acclaimed macro-economic author who posts on the popular blog, MishTalk.

He notes that the Philadelphia Fed GDPplus measure, which is a combination of GDP and GDI (but not an average) and describes quarter-to-quarter real growth on an annualized basis, is flashing red, i.e. has been experiencing negative growth.

In his research, Shedlock notes that each time the indicator has registered two consecutive quarters of negative growth, the economy has been in recession.

He found this pattern going back through to 1960, with all 9 recessions being identified either on time or one or two quarters early by GDPplus.

That means that so far, the indicator has had an incredible 100% hit rate.

However, this measure should not be mistaken for a leading indicator since the GDI and GDP data undergo significant revisions.

Even so, Shedlock adds that of GDP, GDI, and GDPplus,

…I strongly suggest based on past performance GDPplus offers the best recession signal.

As per the chart above, a recession may technically have begun in Q4 2022, when the measure dipped to (-)1.2% followed by (-) 0.7% in Q1 2023.

In the latest report, the measure has exited negative territory to rise to 0.6%, although it was revised down from an earlier estimate of 1.5%.

It would be interesting to see if the Q2 2023 reading is revised even further downwards in the subsequent print.

As a result, the economy may still be very much in a recession, as implied by the preliminary reading of GDPplus.

Outlook

Other regional data for manufacturing that was released earlier this month has proved to be mixed.

However, the ISM Manufacturing PMI, which is due to be published on Friday, will likely rise significantly, owing to the surge in the Chicago PMI.

Having said that, TradingEconomics.com only forecasts a rise to 47, above the previous reading of 46.4.

Whatever the degree of improvement, the measure is almost certain to remain in contractionary territory.

A negative Manufacturing ISM reading is likely to weigh on the greenback.