Chicago ISM - Has The Recovery Peaked?

This mornings release of the Institute of Supply Management's Chicago Business Barometer Index was more negative than the headline numbers suggest.  The knee jerk reaction to the report was that it slowed but was still at a high rate of expansion at 60.2 which is 9.8 points above a level of "contraction" at 50. However, as we discussed in this past weekend's newsletter ( Pollyanna Meets The Economy ) it is more important to understand the trend and implications of the data rather than just the number itself.  This is because by the time the index hits 50 and the media begins to discuss the possibility of a recession - the negative impact to investors will already be much further advanced.

The first takeaway from today's report is that the index has reached a peak for this economic recovery cycle.  This plays in well with our expectations that there will be a weaker growth cycle ahead for the economy as the impacts from tax credit expiration, the completion of the manufacturing restart post the Japanese earthquake and a cash strapped consumer begin to weigh in. 

Secondly, in a further sign of potential forthcoming weakness, Order Backlogs took a steep decline of 9 points into contractionary territory of 48.3.  Like the index itself the trend and direction of the backlog of inventory tends to lead the overall index itself.   Backlogs are orders that are waiting to be filled and as new orders slow down - order backlogs are worked ...