Chicago Purchasing Managers Index: Demand For Oil Dispersant Is Outstripping Supply

The Chicago Purchasing Managers Index (or Chicago Business Barometer) measures business activity in the Midwest.  The Chicago Business Barometer is an extremely timely index as it comes out right before the ISM manufacturing index (which comes out tomorrow).  On a month-to-month basis this index moves about 60% of the time with the ISM manufacturing index with a correlation close to 90% in the size of the change.

ISM-Chicago, an affiliate with the Institute for Supply Management, questions about 200 purchasing managers from Illinois, Indiana and Michigan on business activity in their districts.  Answers received are compiled and a diffusion index is produced based on a weighted average of the five sub-component indexes:
1) new orders - 35%
2) production - 25%
3) order backlogs - 15%
4) employment - 10%
5) supplier deliveries - 15%

How does one go about interpreting this index?
The diffusion index functions like the ISM manufacturing survey index:
A reading above 50 indicates expansion, while one below 50 hints at contraction

Here is what the latest report has to say:

"The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER indicated the breadth of expansion showed little change, and chalked up a ninth month of growth."

The index read 59.1 for June as compared to 59.7 in May, which means that although business is still growing it is growing at a slower rate than last month.

In a look at how the Gulf Coast Oil spill has impacted the Midwest economy, one of the general comments at the end of the report noted that demand is outstripping supply for the chemicals used to create oil dispersant:

"There has been an increase in order time for products which are purchased to make finished products. This is related to the chemical industry and the requirements for many components used in finished fluids for oil dispersants used in the Gulf Coast Oil spill." 

Why I Keep The Beige Book Under My Pillow. . .

It gives me vivid dreams of whats to come in the economy and I like that, also it matches the color of my pillow case. The Beige Book is a summation of the 12 regional Federal Reserve Banks on whats currently occurring. It's a snapshot of the economy which is released 8 times a year, generally two weeks before the Fed's FOMC meetings. If you want to have some sort of a clue as to what the Fed will recommend at the next FOMC meeting then read the Beige Book and the Fed's speeches. The Beige Book is based on interviews with local business people and academics from each of the 12 regions. A look inside this report (The WSJ econ blog has its own tidbits here) reveals that economic activity has continued to improve but growth is at a "modest" pace.

Home sales and construction picked up till the end of the Home Buyers Tax Credit which expired on April 30th, and coincidentally in May these areas have been reported as slowing. Lower rents have pointed as a reason for increasing leasing activity in New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco. One noteworthy extract is that some districts cited concerns over the potential impact of the European fiscal crises on financial and business conditions. These districts reported a corresponding increase in uncertainty and financial market volatility.

A look at Cleveland's report (since Cincinnati is a local branch) reveals that demand by business for new loans remains weak sauce. However, some bankers commented that the lending environment is starting to grow more competitive. This is generally consistent with yesterdays release of the Small Business Optimism Index . On a positive note, a large majority of the contacts reported that inventories are now well balanced which reflects increased demand. Furthermore, the number of respondents who plan on additional spending during the second half of 2010 has increased "substantially" since the last report.

For some Gulf oil spill action, the Atlanta Feds district said that contacts indicated the potential impact on the tourism industry along the coast line of Louisiana, Mississippi, Alabama, and western Florida could be substantial:

"In some cases, vacation lodging cancellations have been replaced by bookings for clean up crews, laborers, and the National Guard."