Surprising Strength in Chicago PMI, Improvement in Construction Spending

The May Chicago Purchasing Managers' Index leapt higher this morning to 61.7 (consensus 54), nine points above the 52.9 level of the prior month, and an indication that the manufacturing sector is expanding again. Manufacturing currently accounts for about 12% of the total economy in the U.S. The weaker dollar should help fuel demand for U.S. exports.

Production rose to 69.8, the highest level in over two years, and new orders rose 15 points to 71.1. Order backlogs and inventories also rose, each moving back above 50, indicating growth. Demand for employees also rose by 7 points to 57 in May.

Higher energy and general commodity prices elevated prices paid to 70.2.

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Construction spending was slightly positive for the last two months on improved demand for non-residential properties such as hotels and factories. Total demand grew +.1% in April, and was revised higher to +.6% in March from +.2% originally reported. Residential spending fell -.9% while non-residential rose +1% MoM.

Private spending fell -.1% MoM in April while public spending rose +.7%, mainly in residential developments. This trend plays out in the annual data as well, with private investment falling -5.2% YoY and public demand rising +9.4% YoY. Over the past year, total construction spending has fallen 2% YoY, with residential declining by -14.1% YoY and non-residential rising by +12.7% YoY.

Homebuilding remains in a slump, falling to the lowest level in three years. Private residential construction spending fell 1% in April, for the second month in a row. Weak home construction has subtracted from GDP for the past six quarters.