This morning we learned the three-month moving average for Chicago PMI climbed 2.2 to 63.7, the highest reading since the three months ending April 2011 (the actual figure for June missed expectations and came in behind).
Deutsche Bank’s Joe LaVorgna says this confirms we are in the midst of a “snapback” from an anomalous Q1 GDP contraction. In particular, he says, the growth sub-index of Chicago PMI is highly correlated with GDP readings.
Admittedly, the former did not accurately predict Q1’s terrible GDP performance (-2.9%), but neither did many other series such as nonfarm payrolls, retail sales or industrial production. The current gap between the two series — Chicago production and real GDP — is at a record wide reading — at least going back to 2000. In the past, when there was a yawning gap between the two variables (2011), real GDP snapped back, growing over 3% in the ensuing three quarters. Incidentally, 2011 was the last year in which we had a quarterly decline in GDP (-1.3% in Q1). We are expecting a similar economic profile this time around with GDP expected to expand by 3.8% over the remainder of this year.
LaVorgna now sees GDP in Q2, which ends today, coming in at 4.2%. Here’s his chart plotting the production component of Chicago PMI against GDP: