The November 2022 Chicago Business Barometer paints a troubling picture of the economy in the Chicago area, with the index falling to 37.2. This is the third month in a row of decline and the lowest level since the 2008/09 Global Financial Crisis, not counting the short-term shock from the COVID-19 pandemic in 2020. The sharp drop suggests growing risks of a broader economic downturn, both locally and potentially across the U.S., given Chicago’s important economic role.
The New Orders component of the index saw a significant drop, falling 8.5 points from October to a concerning 30.7. This indicates a major decrease in demand, with almost half of the surveyed companies reporting fewer orders. Contributing factors include ongoing inflation, a slowdown in the housing market, and high inventory levels. These issues are making it harder for businesses to get new orders, creating a cycle where lower demand leads to further economic slowdown.
Order Backlogs, another key part of the index, also fell significantly, dropping 11.2 points to 36.1. This suggests that companies are quickly filling their existing orders due to fewer new orders. The decrease in backlogs is troubling because it implies that businesses don’t expect a quick rebound in demand. Instead, they’re focusing on current orders without taking on more future work, reflecting a cautious outlook in an uncertain economic environment.
On a brighter note, the Employment component of the index saw a slight rise of 1.5 points to 47.1. Although this is a positive sign, the index is still below the neutral mark of 50, meaning employment levels are still shrinking, just at a slower rate. This small increase might suggest that businesses are trying to keep their staff in case of a future recovery despite ongoing economic challenges. However, the continuing drop in employment highlights the difficulties businesses face in managing their workforce amidst a slowing economy.
Inventories grew by 2.9 points to 59.8, indicating that firms are adjusting their stock levels in response to weaker orders. This growth in inventories suggests businesses are preparing for future demand, but it also highlights the challenge of managing stock in a slow economy. The increase in inventories combined with falling new orders could lead to further complications if demand doesn’t improve.
One area of improvement was in Supplier Deliveries, which fell by 9.4 points to 49.9. This drop indicates that supply chain issues, a major problem during the pandemic, are starting to ease. As supply chain problems decrease, delivery times are beginning to return to pre-pandemic levels, although they are still longer than usual. Despite this improvement, supply chain issues remain, so businesses can’t fully depend on these gains for a recovery.
The Prices Paid component of the index also showed signs of easing, dropping by 8.6 points. This suggests that inflationary pressures, particularly in areas like freight costs, are starting to lessen. The Prices Paid sub-index is now 15.9 points below its 12-month average, indicating a slower rate of price increases. While this is good news for businesses, costs are still rising, and many companies continue to struggle with passing these costs on to customers.
A significant challenge noted in the report is that only 30% of businesses could fully pass rising costs onto customers. The majority, 60%, could only partially pass on these costs, while 10% couldn’t increase prices at all. This difficulty in maintaining profitability amid rising costs and weaker demand underscores the tough environment for businesses. Companies may need to make tough choices about pricing, production, and workforce management to stay afloat.
The Chicago Business Barometer measures key aspects like New Orders, Production, Employment, Order Backlogs, and Supplier Deliveries. It is seen as an early indicator of economic activity in Chicago, often reflecting broader national trends. The sharp drop in November 2022 suggests that the Chicago area is facing serious economic challenges that could impact the U.S. economy as a whole. Given Chicago’s role as an economic hub, a prolonged downturn in this region could signal trouble for the national economy.
The November 2022 Chicago Business Barometer presents a grim outlook for the Chicago economy. Most indicators point to a worsening situation, with businesses struggling with production, order acquisition, and cost management. While there are some signs of improvement, such as slight gains in employment and inventories, the overall trend suggests continued contraction. As businesses deal with these issues, the broader U.S. economy may also face growth risks, highlighting the need for flexibility and resilience in a challenging economic environment.
This situation calls for close monitoring and potentially prompt action from businesses and policymakers to prevent a more severe downturn. Businesses may need to focus on managing costs, improving efficiency, and planning strategically, while policymakers might consider measures to support demand and stabilize key economic sectors. The coming months will be crucial in determining whether the Chicago area and the U.S. economy can recover or if more significant challenges are ahead.
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