Chicago Business Activity Plunges, Fueling Economic Slowdown Fears
The key regional index unexpectedly fell to its lowest level since May 2020, with sharp declines in new orders and employment signaling a deepening manufacturing downturn.
A key gauge of business activity in the U.S. heartland unexpectedly collapsed in November, falling to its lowest level since the pandemic-driven shutdowns of May 2020 and intensifying concerns that the nation's manufacturing sector is facing a severe contraction.
The MNI Chicago Business Barometer plummeted to 36.3, a sharp decline from October's 43.8 reading and well below economists' forecasts of a modest rise to 44.3. A reading below 50 indicates contraction, a threshold the index has now failed to breach for 24 consecutive months, signaling a prolonged and deepening downturn in the region.
The report's internal metrics revealed broad-based weakness that spooked analysts. The new orders component experienced its largest one-month drop in over a year, while order backlogs and the employment index both fell to their lowest levels since the spring of 2009, during the depths of the financial crisis. The data suggests that businesses are not only seeing a drop in current demand but are also rapidly working through existing orders with little expectation of a near-term recovery.
Adding to the concern, the only major component to show strength was the 'prices paid' index, which rose to a four-month high. This combination of collapsing activity and rising input costs points to a challenging stagflationary environment for producers, squeezing profit margins and complicating the outlook for inflation.
"The dramatic, worse-than-expected slump in Chicago highlights a significant deterioration," noted one economist in a research note. "It points to a challenging environment for goods producers that is more severe than previously anticipated."
The grim report from Chicago provides a worrying counterpoint to more moderate national data. The latest ISM Manufacturing PMI, while still in contraction territory at 48.4, had suggested the downturn in the national factory sector was beginning to slow. The severity of the regional slump could be a leading indicator for a weaker national report and a broader economic slowdown.
This evidence of a cooling economy lands as the Federal Reserve navigates a delicate policy path. The central bank has already begun a modest easing cycle in response to slowing growth and a cooling labor market. Data as weak as the Chicago PMI reading could increase pressure on policymakers to accelerate the pace of interest rate cuts to stave off a more significant recession.
Coming on the heels of a report showing U.S. consumer confidence falling to its lowest level since April, the manufacturing data paints a picture of an economy losing momentum as the year concludes. While the service sector has remained more resilient, the pronounced weakness in the goods-producing economy is a clear headwind for overall growth.