U.S. Chicago PMI Plunges in May, Recession Fears Intensify
The data released on Friday hit the market like a bombshell. The U.S. Chicago PMI for May unexpectedly plummeted to 35.4, far below the forecast of 41.5 and even lower than all economists' estimates in media surveys. The figure was so dismal that even the financial blog Zerohedge called it "shockingly low."
Looking back to April, the PMI had already unexpectedly dropped to 37.9, and markets had hoped for improvement in May. Instead, the index deteriorated further. Such weak performance inevitably draws comparisons to the COVID-19 pandemic and the global financial crisis periods.
As a key indicator measuring manufacturing and business activity in the U.S. Midwest, a Chicago PMI reading below 50 signals economic contraction. The May figure of 35.4 suggests an intensifying downturn in the region. Historically, such low readings are indeed rare—the last instances occurred during the pandemic-induced economic shutdown and the Great Recession triggered by the global financial crisis.
Multiple factors contributed to this dismal data. First, the Federal Reserve's aggressive interest rate hikes have severely dampened economic activity. Higher borrowing costs have weighed on corporate and household spending, with many businesses facing financial pressures that force production cuts, further weakening overall commercial activity. Second, slowing global growth and unstable international trade conditions have hurt manufacturing exports in the Midwest. Some regional manufacturers rely on overseas markets, but weakening global demand has led to a sharp decline in orders.
The data has profound implications for the U.S. economy and financial markets. On the macroeconomic front, the Chicago PMI’s plunge has heightened fears of an impending recession. Rising recession risks could further erode consumer confidence, leading to reduced spending and a vicious cycle. In financial markets, stocks bore the brunt of the sell-off as investors grew increasingly wary of economic prospects, driving equity prices lower. Meanwhile, bond markets saw a flight to safety, with investors piling into relatively secure assets, pushing bond prices up and yields down.
For the U.S. government and the Federal Reserve, this data presents a serious challenge. The Fed faces a tough dilemma between controlling inflation and sustaining economic growth. Further rate hikes to curb inflation could deepen the economic slowdown and hasten a recession, while pausing or cutting rates risks reigniting inflationary pressures. Meanwhile, the government may need to consider fiscal stimulus measures to bolster the economy, though this could exacerbate budget deficit concerns.
Overall, the dismal May Chicago PMI has cast a dark shadow over the U.S. economic outlook. Going forward, markets will closely monitor policy responses from the government and the Fed, as well as subsequent economic data, to gauge whether the U.S. economy is truly sliding into a recessionary abyss.
