Economic Indicator Hits Lowest Level Since 2009

An indicator of business activity in fell to its lowest point since July 2009, with double-digit declines in production, new orders, and inventory backlogs.

The Institute for Supply Management’s Chicago Business Barometer fell 13.6 points in February, indicating a contraction of business activity in the region for the first time since 2013.

An indicator of business activity in fell to its lowest point since July 2009, with double-digit declines in production, new orders, and inventory backlogs.

The Institute for Supply Management’s Chicago Business Barometer fell 13.6 points in February, indicating a contraction of business activity in the region for the first time since 2013.

The sudden drop was unexpected by analysts, but has been attributed to cold weather and the strike at ports on the West Coast, which have caused inventories to plummet throughout the west and Midwest. The ISM said the fall “represents a change in the relatively strong trend seen recently,” adding that it may indicate less GDP growth in the first quarter of 2015 than many analysts are expecting.

The report noted, “Unseasonably cold weather and the extreme blizzards seen on the East Coast also had an impact” on deliveries and aggregate demand. However, some analysts have noted that this year’s cold weather has been less widespread than in 2014, when cold weather caused an economic contraction. Many economists believe strong growth remains likely for the first quarter of 2015, if only because economic activity was extremely weak in the same period a year ago.

While cold weather and the port strike are headwinds, keeping business activity down, the report also noted that disinflationary pressures and a low demand for commodities were contributing to the sluggishness.

Pessimism Mounts

Business optimism is also suffering, as indicated by the level of new orders. While businesses place new orders in the hope of greater demand from consumers, a fall in new orders often indicates expectations of less consumption in the near term. New orders fell to the lowest level since June 2009, experiencing the “largest monthly decline on record,” according to the ISM.

The fall in New Orders is also causing employment to suffer. After reaching a 14-month high in January, employment says a double-digit decline in February. This may indicate that more unemployment and less spending is going to hit the Midwest, which recently saw higher real estate sales and prices and a stronger labor market.

GDP Revised Downward

In addition to the fall in production in the first quarter of 2015, U.S. GDP growth revised downward last Friday, when the Bureau of Economic Analysis announced GDP rose by 2.2%. Previously, the BEA said GDP rose by 2.6% in the fourth quarter.

In addition to a fall in GDP growth, the BEA also revised downward its estimate for personal consumption expenditures, from one tenth of one percentage point to 4.2%.

While a high rate of growth, PCE expects to see accelerated growth as consumers have more discretionary income thanks to lower unemployment and cheaper oil. In reality, little evidence of that trend has surfaced.