http://www.nasdaq.com/aspxcontent/N...CQDJON200701311211DOWJONESDJONLINE000743.htm& UPDATE: Chicago PMI For January Indicates Contraction (Updates with context throughout, including comments from NAPM Chicago, reference to Wednesday's U.S. GDP report, and market reaction to the day's data.) By Howard Packowitz Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- The National Association of Purchasing Management- Chicago reported Wednesday that its index of manufacturing activity fell to 48.8 in January from 51.6 the month before, a sign of economic contraction in one of the nation's largest industrialized regions. The release of the number - which was well below analysts' expectations for a reading of 52.0, according to a survey of analysts conducted by Dow Jones Newswires - came only hours before Federal Reserve policy makers were to issue their next decision on interest rates. The Fed's monetary policy committee is keeping close tabs on economic indicators as it decides whether to adjust rates after leaving them unchanged at each of its last four meetings. A reading below 50 in the Chicago index reflects a contractions in manufacturing activity. The index initially slipped below 50 in November, though that figure was later revised above 50. Therefore, the January figure represents the first time since April 2003 that the Chicago PMI indicates a contraction. NAPM-Chicago said in a press release that the latest data are in line with a " clear downward trend" of almost two years. By any measure, "January was weak and 2007 is taking on the robes of concern woven in the past two years," NAPM- Chicago said. Follows Stronger-Than-Expected GDP Data Federal Reserve policy makers have said on several occasions that they expected moderating economic growth, which would reduce inflationary pressures. However, a string of other recent data have indicated that the economy is doing better than many observers had expected. That has led many market participants to factor out the possibility of rate cuts for at least the next several months. A key example of stronger-than-anticipated economic data was revealed Wednesday morning, as the Commerce Department reported that gross domestic product during the fourth quarter of last year rose 3.5%, above analysts' consensus estimate for 3.0% growth during the period. The strong GDP report caused Treasury bonds and interest rate futures prices to fall, only to rally again as traders reacted to the weaker-than-anticipated Chicago index. The U.S. dollar erased much of its gains versus other currencies as market participants mulled over the impact of the strong GDP figure and the soft Chicago data. Late Wednesday morning, Eurodollar futures - a quarterly measure of short-term rate expectations - priced in only about a 12% chance that the Federal Open Market Committee will reduce its benchmark federal funds rate to 5%, from the current 5.25%, in the first quarter, which was unchanged from Tuesday. The June Eurodollar contract priced in about a 24% chance for a 5% funds rate in the second quarter, up from about 20% odds at Tuesday's close. The September contract reflected about a 56% probability for a 5% rate in the third quarter, up from about a 48% chance as factored in at Tuesday's close. The Federal Open Market Committee is expected to keep the federal funds rate steady at 5.25% again upon completion of its meeting Wednesday, with an announcement due at 2:15 p.m. EST. Chicago Data Show Inflation Subsides, Demand Weak The Chicago index is based on a survey of purchasing managers in northern Illinois and northwestern Indiana, one of the larger industrial regions in the U.S. The Chicago survey is closely watched for clues to nationwide index on manufacturing from the Institute for Supply Management, due Thursday at 10 a.m. EST. The consensus estimate of analysts surveyed by Dow Jones Newswires projects an ISM index reading of 52.0 in January, compared with 51.4 in December. Among the categories in the Chicago index released Wednesday, supplier deliveries rose to 52.2 in January, from 45.7 in December. The January employment index reading of 42.8 was down from 48.2 in December. The new orders index dropped to 46.3 in January, from 56.3 in December. Prices paid in January fell to 54.9 in January, from 56.9 the previous month. The prices component has fallen dramatically from a reading of 88.0 in June 2006, according to NAPM-Chicago. "The good news that the threat of escalating inflation appears to have abated is replaced by a concern that demand is sufficiently weak that margin squeezes could be a mantra of 2007," NAPM-Chicago said. "Beyond the price concerns, the January Chicago Purchasing Managers' survey revealed a report that is not only consistent but also worrisome," NAPM-Chicago said. The monthly Chicago PMI report is compiled by Kingsbury International on behalf of NAPM-Chicago. -By Howard Packowitz, Dow Jones Newswires; (312) 750 4132; howard.packowitz@ dowjones.com (Stephen Wisnefski contributed to this article) (END) Dow Jones Newswires 01-31-071211ET Copyright (c) 2007 Dow Jones & Company, Inc.