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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
"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
* 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
* 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.
