Chicago Fed Manufacturing Index Falls

Manufacturing activity in five Midwestern states fell 2.3% in January from a month earlier, dropping to its lowest level since October 2005, according to data released Monday by the Federal Reserve Bank of Chicago.

The Chicago Fed Midwest Manufacturing Index - a measure of manufacturing output in Illinois, Indiana, Iowa, Michigan and Wisconsin - fell to a seasonally adjusted level of 102.1 in January, from 104.6 in December. The Chicago Fed said in a press release that the December figure was revised from a previously reported 104.5.

All four of the regional industry sectors measured in the index fell in January. Autos and machinery registered the biggest declines, falling 3.5% and 2.7%, respectively.

The drop in regional activity at the start of the year was much stronger than the 0.8% decline in January in the manufacturing component of the industrial production index compiled by the Federal Reserve Board, which measures activity on a national level. Also, the national index is up 1.9% from a year earlier, whereas the Chicago Fed index dropped 1% year over year.

The decrease in Midwest economic manufacturing activity runs opposite to other economic data in the last week, which have largely come in stronger than economists' expectations and show a U.S. economy that continues to grow at a moderate pace. However, most of the recent data have been based on February figures, whereas the Chicago Fed index is for January.

The recent data have signaled inflation risks are still evident, and have led market participants to scale back their expectations for interest rate cuts from the Fed. The Federal Open Market Committee is widely expected to announce Wednesday that it is leaving its benchmark rate unchanged at 5.25% for the sixth-straight meeting. Market participants do see the FOMC cutting its rate in the third quarter.

The Midwest economy has been particularly hard hit by the problems facing the Big Three U.S. auto makers - each of which have scaled back production as they restructure - and their parts suppliers. General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group each are based in Michigan and have a large manufacturing presence in the Midwest.

The 3.5% decline in auto sector output in the Midwest, which came on the heels of a 1.4% increase in December, compared with a 2.1% decline nationwide in January. Compared with a year earlier, auto sector production was down 4.9% in the Midwest, while nationwide output increased 0.3%, the Chicago Fed said.