April 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing contracted further in April. The PMI registered 41.5%, down 7.6 percentage points (PP) from the March reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Except for another surge in slow deliveries (+11.0PP), all sub-indexes were negative (and generally more so than in March). Declines in new orders (-15.1PP), production (-20.2PP) and employment (-16.3PP) were particularly noteworthy.

"Comments from the [manufacturing] panel were strongly negative (three negative comments for every one positive comment) regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) pandemic and continuing energy market recession,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “The PMI indicates a level of manufacturing-sector contraction not seen since April 2009, with a strongly negative trajectory.” 

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The non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- dropped into contraction (-10.7PP, to 41.8%). A further jump in slow deliveries (+16.2PP, to a record-high 78.3PP) limited the decrease in the composite NMI; drops in new orders (-20.0PP) and employment (-17.0PP) were also among the most noticeable changes. 

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Of the industries we track, only Paper Products expanded. Common themes among respondent comments included demand volatility from the coronavirus, supply chain disruptions, and oil. Most relevant were the following:

Paper Products. "Our packaging business is starting to see signs of a slowdown in May after two strong months into COVID-19."

Construction. "COVID-19 is altering the operation, supply chain and sales process of home-building. Stay-at-home orders have hampered business in residential construction. As ours has been deemed an essential industry, we continue to navigate changing guidelines and restrictions on a daily basis."

Relevant commodities:

Priced higher. Freight.

Priced lower. Crude oil, fuel (diesel and gasoline) and natural gas.

Prices mixed. None.

In short supply. Labor (construction and temporary), paper products and toilet paper.

Findings of IHS Markit’s April surveys paralleled those of their ISM counterparts.

Manufacturing. Sharpest contraction in output in series history due to COVID-19 impact.

Key findings:

* Survey record decline in production
* Output expectations turn negative for first time in the series history
* New orders, employment and inventories fall at steepest rates since the global financial crisis

Services. COVID-19 impact drives record decline in business activity.

Key findings:

* Unprecedented contractions in output, new business and employment
* Business expectations turn pessimistic
* Output charges fall at sharpest rate on record

Commentary by Chris Williamson, Markit’s chief business economist:

Manufacturing. "April saw the manufacturing sector struck hard by the COVID-19 pandemic, with output falling to an extent surpassing that seen even at the height of the global financial crisis. With orders collapsing at a rate not seen for over a decade, supply chains disrupted to a record degree and pessimism about the outlook hitting a new survey high, rising numbers of firms are culling payroll numbers.

“Consumer-facing businesses are being hit by slumping demand from households as April saw widespread lockdowns, but business spending on inputs and equipment has also tumbled as companies slash production and investment.

“Smaller firms are being hit the hardest, and also reporting the highest job losses, but large firms are also seeing the sharpest downturn on record.

“With infection curves showing signs of flattening, it is naturally hoped that the economic downturn will also bottom out. As restrictions are lifted, demand should gradually revive, but the trade-off between risking a second wave of infections and bringing the economy back to life looks set to be one of the greatest challenges faced by policy- and lawmakers in recent history. The process will inevitably be led by caution, meaning recovery will also be frustratingly slow.”

Services. “The slump in the business survey indicators to all-time lows in April indicates how the 4.8% rate of economic decline seen in the first quarter will likely be dwarfed by what’s to come in the second quarter. Measures to fight the COVID-19 outbreak mean vast swathes of the service sector have been especially hard hit by travel restrictions and social distancing, with temporary company closures and dramatically reduced demand resulting in an overall drop in activity of even greater magnitude than seen during the height of global financial crisis.

“With hope, infections rates have peaked and the economic downturn should start to ease as virus-related restrictions are lifted. However, while manufacturing may see a rebound in production as increasing numbers of factories are allowed to reopen, prospects look bleaker for many parts of the services economy, especially where businesses rely on travel, social gatherings or close contact with customers. Businesses such as airlines, bars, restaurants, cinemas, sports arenas and other recreational activities will likely be at the back of the line in terms of being able to reopen to anything like previous capacity levels, meaning the recovery will be long and slow.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.