EconoFACTS: U.S. Manufacturing ISM: DELAYED....The Deliveries, Not the Index
Jennifer Lee, Director and Senior Economist
|
April 01, 2020
|
Addressing Covid 19,
Economic Insights
- Keywords:
- covid-19
Jennifer Lee, Director and Senior Economist
|
April 01, 2020
|
Addressing Covid 19,
Economic Insights
March was a brutal month for global manufacturers. Euro Area manufacturing PMI sank to the lowest level since 2012 (at 44.5), or since 2009 for Germany and Italy (at 45.4 and 40.3, respectively), and 2013 for France (at 43.2). Japan's PMI was at the lowest since 2009 (at 44.8). Ditto for South Korea (at 44.2). Take China out of this for now, as it hit record lows in February.
So now, we see the U.S. manufacturing PMI slipping just one point to 49.1 in March to only a 3-month low. "Say what?" (in a high-pitched voice). "Is this some sort of an April Fool's joke?"
No. Don't be fooled by the headline. (Sort of like the ADP... more on that below.) The main components told a much starker tale. New orders were at the lowest level since March 2009 and only nine industries reported growth. Production (an indicator of current activity) tumbled as well, but only to a 3-month low. (Look for a big dive in April.) Inventories continued to contract (at 46.9). And employment fell 3.1 pts to 43.8, the lowest since May 2009.
"So why was the headline decline so restrained?" Supplier delivery delays, that weird component that adds to the headline the further above 50 it goes. Slower deliveries are a positive for the index... in the old days, it was a sign that suppliers were busy and were unable to get their widgets to you on time. Well, not now. The supplier delivery delays component jumped 7.7 pts to a 22-month high of 65.0, or the second highest since June 2004. Fully 16 industries reported delays in receiving their goods. According to the ISM folks, "Suppliers continue to struggle to deliver .... the coronavirus pandemic was the focus of 66 percent of this subindex’s comments, with a third of those comments related to supply chain constraints from China.” Note that there are five equally-weighted components that make up the headline; excluding this "positive", the ISM would be somewhere around 45.
Expect a much sharper decline in April.
Timing also counts. Back to employment ... it is all about timing. The ADP national report for March was far better than expected, with "only" 27,000 jobs were lost in March. Compared to expectations of a 180,000 loss, this was suspiciously not bad. But please... do NOT get your hopes up. The ADP warned that the survey only covered the period up to March 12, and "does not reflect the full impact" of the coronavirus on hiring/cutting. This should help set expectations for the official BLS report due out on Friday. As I said yesterday, the range of estimates is as big as the ocean but it is all about timing. We know companies have slashed jobs but when the survey picks it up is unclear.
Now as far as the ISM manufacturing survey goes, it was almost all about the virus. Indeed, the comments from the respondents were telling... a grim reminder of what businesses are dealing with (except those in the food industry). Of the 18 industries in the survey, 10 reported expansion, which is down from 14 in February and 16 a year ago.
-
“COVID-19 is impacting China’s raw material supply chain. We are now seeing revenue impact in that region. Our operations team is reviewing plans for spread of the virus.” (Computer & Electronic Products)
-
“The two main issues affecting our business [are] COVID-19 and the oil-price war. We are in daily discussions and meeting constantly, updating tracking logs to document high risk concerns.” (Chemical Products)
-
“COVID-19 impact has extended to Europe and North America. The virus escalation is affecting our purchasing and logistics operations. We have incurred air-shipment and production interruptions due to shortages of raw materials and components.” (Transportation Equipment)
-
“We are experiencing a record number of orders due to COVID-19.” (Food, Beverage & Tobacco Products)
-
“World demand for petroleum products is declining, while supply is ramping up. We have lost supply chain visibility to certain locations.” (Petroleum & Coal Products)
-
“COVID-19’s spread in the U.S. may start impacting our domestic business. As for Asian suppliers, they are starting to get back up to speed.” (Fabricated Metal Products)
-
“COVID-19 has caused a 30-percent reduction in productivity in our factory.” (Machinery)
-
“A big part of our business is hospitality, and we are seeing demand drop and an increase in cancellations.” (Nonmetallic Mineral Products)
-
“All North American manufacturing plants have ceased operations or drastically scaled back as a result of customer plant closings and other responses to COVID-19.” (Plastics & Rubber Products)
-
“Volumes are down 4.3 percent, and some areas of the supply chain are being affected by the coronavirus.” (Furniture & Related Products)
https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1
The non-manufacturing ISM is out on Friday. That could arguably be worse than its manufacturing cousin.
In a separate release, U.S. construction spending was weaker than expected in February, falling 1.3% in the month, although January's increase was revised up (from 1.8% to +2.8%). Both residential and non-residential spending contracted, from both the public and private sectors. Weaker demand, lack of materials, lack of visibility... the list goes on. Now about that newly proposed $2 trln infrastructure bill (Phase 4) ...
The Bottom Line: I'm not ffffooolin. Don't be fooled by this manufacturing ISM reading where every single indicator out there is pointing very clearly at a huge contraction in U.S. GDP in the first half of this year. The components matter.
Table 1 - United States — ISM Manufacturing Index
View important Disclosure Statements at economics.bmo.com/en/disclosure
.
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Jennifer Lee, Director and Senior Economist
Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high-frequency data analysis on key U.S. economic releases, as well as her commentary analyzing central bank activity in the U.K., the Euro Area and Japan. Her entertaining, easy-to-understand and call-it-like-it-is writing style has earned her a devoted following. Jennifer is also one of t…
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March was a brutal month for global manufacturers. Euro Area manufacturing PMI sank to the lowest level since 2012 (at 44.5), or since 2009 for Germany and Italy (at 45.4 and 40.3, respectively), and 2013 for France (at 43.2). Japan's PMI was at the lowest since 2009 (at 44.8). Ditto for South Korea (at 44.2). Take China out of this for now, as it hit record lows in February.
So now, we see the U.S. manufacturing PMI slipping just one point to 49.1 in March to only a 3-month low. "Say what?" (in a high-pitched voice). "Is this some sort of an April Fool's joke?"
No. Don't be fooled by the headline. (Sort of like the ADP... more on that below.) The main components told a much starker tale. New orders were at the lowest level since March 2009 and only nine industries reported growth. Production (an indicator of current activity) tumbled as well, but only to a 3-month low. (Look for a big dive in April.) Inventories continued to contract (at 46.9). And employment fell 3.1 pts to 43.8, the lowest since May 2009.
"So why was the headline decline so restrained?" Supplier delivery delays, that weird component that adds to the headline the further above 50 it goes. Slower deliveries are a positive for the index... in the old days, it was a sign that suppliers were busy and were unable to get their widgets to you on time. Well, not now. The supplier delivery delays component jumped 7.7 pts to a 22-month high of 65.0, or the second highest since June 2004. Fully 16 industries reported delays in receiving their goods. According to the ISM folks, "Suppliers continue to struggle to deliver .... the coronavirus pandemic was the focus of 66 percent of this subindex’s comments, with a third of those comments related to supply chain constraints from China.” Note that there are five equally-weighted components that make up the headline; excluding this "positive", the ISM would be somewhere around 45.
Expect a much sharper decline in April.
Timing also counts. Back to employment ... it is all about timing. The ADP national report for March was far better than expected, with "only" 27,000 jobs were lost in March. Compared to expectations of a 180,000 loss, this was suspiciously not bad. But please... do NOT get your hopes up. The ADP warned that the survey only covered the period up to March 12, and "does not reflect the full impact" of the coronavirus on hiring/cutting. This should help set expectations for the official BLS report due out on Friday. As I said yesterday, the range of estimates is as big as the ocean but it is all about timing. We know companies have slashed jobs but when the survey picks it up is unclear.
Now as far as the ISM manufacturing survey goes, it was almost all about the virus. Indeed, the comments from the respondents were telling... a grim reminder of what businesses are dealing with (except those in the food industry). Of the 18 industries in the survey, 10 reported expansion, which is down from 14 in February and 16 a year ago.
-
“COVID-19 is impacting China’s raw material supply chain. We are now seeing revenue impact in that region. Our operations team is reviewing plans for spread of the virus.” (Computer & Electronic Products)
-
“The two main issues affecting our business [are] COVID-19 and the oil-price war. We are in daily discussions and meeting constantly, updating tracking logs to document high risk concerns.” (Chemical Products)
-
“COVID-19 impact has extended to Europe and North America. The virus escalation is affecting our purchasing and logistics operations. We have incurred air-shipment and production interruptions due to shortages of raw materials and components.” (Transportation Equipment)
-
“We are experiencing a record number of orders due to COVID-19.” (Food, Beverage & Tobacco Products)
-
“World demand for petroleum products is declining, while supply is ramping up. We have lost supply chain visibility to certain locations.” (Petroleum & Coal Products)
-
“COVID-19’s spread in the U.S. may start impacting our domestic business. As for Asian suppliers, they are starting to get back up to speed.” (Fabricated Metal Products)
-
“COVID-19 has caused a 30-percent reduction in productivity in our factory.” (Machinery)
-
“A big part of our business is hospitality, and we are seeing demand drop and an increase in cancellations.” (Nonmetallic Mineral Products)
-
“All North American manufacturing plants have ceased operations or drastically scaled back as a result of customer plant closings and other responses to COVID-19.” (Plastics & Rubber Products)
-
“Volumes are down 4.3 percent, and some areas of the supply chain are being affected by the coronavirus.” (Furniture & Related Products)
https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1
The non-manufacturing ISM is out on Friday. That could arguably be worse than its manufacturing cousin.
In a separate release, U.S. construction spending was weaker than expected in February, falling 1.3% in the month, although January's increase was revised up (from 1.8% to +2.8%). Both residential and non-residential spending contracted, from both the public and private sectors. Weaker demand, lack of materials, lack of visibility... the list goes on. Now about that newly proposed $2 trln infrastructure bill (Phase 4) ...
The Bottom Line: I'm not ffffooolin. Don't be fooled by this manufacturing ISM reading where every single indicator out there is pointing very clearly at a huge contraction in U.S. GDP in the first half of this year. The components matter.
Table 1 - United States — ISM Manufacturing Index
View important Disclosure Statements at economics.bmo.com/en/disclosure.
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