April 30th, 2012
The Chicago Business Barometer “tumbled” six points in April to 56.2, a 29-month low and almost five points short of the consensus market estimate (61.0). Although other purchasing manager indices for April had hinted at a commensurate drop in the Chicago-area index, the decline was greater than expected, leading some dealers to lower their forecasts for ISM-PMI due Tuesday. Others took comfort in the 2.4-point rise in the Chicago PMI’s employment component, validating what should be at least a 15k rise in April manufacturing payrolls due Friday.*
* In the Reuters U.S. weekly poll, six primary dealers (and 16 other firms) submitted separate forecasts for the April change in factory payrolls. Forecasts ranged from 15k to 35k; forecasts from non-primary dealer firms ranged from zero to 42k.
Believing Monday’s regional report presents modest downside risk to Tuesday’s national report, Deutsche Bank Global Markets Research lowered its ISM PMI estimate to 51.0 (from 52.5 previously). “A regression-based estimate of the ISM implies a decline to 51.0 from 53.4 in March. This would provide more evidence that factory activity slowed in April. The key question is whether this is an aberration or the start of a new trend. We believe it is the former, because the six-month outlook components of the regional Fed PMIs (New York, Philadelphia and Richmond) are holding up very well, and they tend to be a leading indicator of the factory sector. If our forecast proves correct, this would be the 33rd straight month that the ISM was above 50. Importantly, the employment component of the survey increased (58.7 vs. 56.3), indicating that manufacturing sector jobs growth, which was a bright spot in the March employment report, continued to accelerate in April. As long as employment growth remains healthy, fueling rising demand, we anticipate factory sector growth to remain positive.”
As the Chicago PMI report mirrored declines in regional Fed surveys, economists at Barclays Capital “look for this trend to continue somewhat in the form of a modest decline in the April manufacturing ISM to 52.5 from 53.4 in tomorrow’s release.” Despite an even wider miss to the Chicago PMI than the median, BarCap did not revise its ISM-PMI forecast following the Chicago release. They already expect below-median private NFP growth of 160k.
Despite the U.S. manufacturing sector’s continued expansion, Jefferies & Co. sees “a clear downshift” from recent data. “The pace of expansion is lower but the sector is not falling into recession. We expect that the decline will be temporary but it will take some time to recover.” At 59.0, Jefferies and Mizuho Securities shared the lowest forecast for Chicago PMI among the primary dealers. Both firms also expect ISM to print at 52.0, below median, on Tuesday. Mizuho did not submit a separate factory payrolls forecast but Jefferies expects employment in manufacturing industries to rise by 35k in April, kicking in 20% of what the firm expects will be a 175k rise in private payrolls for the month.
Previewing Monday’s release, Citigroup Global Markets had earlier pointed out that, “The Chicago index has been completely out of sync with other regional and national business surveys. The Chicago area evidently has enjoyed a much more favorable business environment than most areas. We suspect that this reflects the solid rebound in the motor vehicle industry and the concentration of auto suppliers in the Chicago region.” Indeed, motor vehicle output contributed 1.1 percentage points to the Q1 rise in GDP, or half of the 2.2% annual rate increase. After a 1.2-mln rise from November to January, auto assemblies cooled in February and March and are likely to slow further in April. Nevertheless, Citi economists expect manufacturing industries added 15k to April payrolls.
With results from six regional surveys now in hand, BNP Paribas lowered its ISM PMI forecast Monday, from a 0.5-point rise to a 0.9-point fall. “Previously, we had been expecting the national index to increase to 53.9 in April from 53.4 in March. However, following today’s data we are revising our call for April down to 52.5, implying a weaker pace of manufacturing growth in the month.” The six-region average it monitors declined to 53.3 in April, from 54.8 in March.
With an expanded list of eight inputs (five Fed district surveys and three ISM regional surveys), Societe Generale Cross Asset Research predicts the ISM PMI edged one tick lower to 53.3 in April. Interestingly, SG’s forecast is the same after Monday’s release of three inputs as it was before. A result of 53.3 would match the reported January-to-March average and leave them “just marginally” above consensus. Anticipating potential market reaction, SG warns, “There might be just a very limited intraday positive impetus for risk assets if the forecast turns out right.” Presenting the risks to their forecast, SG wrote, “A one-standard-error band around our current model specification estimate would extend from 51.6 to 55.0.”
While some dealers are concerned with the final demand indication (i.e., new orders minus inventories), SG will focus on the report’s jobs component. “Considering that it accurately predicted the reported pick-up in manufacturing payrolls last month, the employment diffusion index likely will receive considerable attention in tomorrow’s report. The rise in the ISM hiring gauge to a nine-month high of 56.1 in March was soon followed by news that factories added 37,000 workers, besting the 31,000 rise posted in February.” SocGen is far below the consensus forecast for NFP growth, figuring just 105k jobs were added in April in either the private sector or after adding government payrolls.
Nomura Securities had the high forecast for Chicago PMI (e: 62.9), they have the second highest forecast for ISM PMI (e: 54.4) and they have the highest forecast for April job growth (e: 195k total, 200k private). The disappointing Chicago PMI result did not alter Nomura’s ISM or jobs forecast but a weak ISM PMI headline or employment component may be too much for their encouraging employment outlook to withstand.
The optimistic anecdotes for factory payrolls were common among purchasing manager surveys but by no means universal. While the employment component in the Chicago PMI rose, that for the Dallas Fed’s Texas Manufacturing Outlook Survey fell by nearly half (to 11.8 from 21.7). Meanwhile, the TMOS index measuring the average workweek fell to -4.6, the worst in 18 months. The Kansas City Fed’s manufacturing employment index stood at 12 in April, unchanged from March but the average employee workweek index slid 12 points to -10 in April, the worst since the first month of the recovery in July 2009.
Despite another miss to the downside in the form of Monday’s Chicago PMI, dealers continue to tease out the positives in the monthly manufacturing surveys, especially as they relate to job growth.