ISM: Covid-19 impacts March manufacturing data

As the global coronavirus, or COVID-19 pandemic, continues to take hold, virtually every aspect of the economy is feeling its effect, coupled with ongoing uncertainty that is taking a toll, especially on manufacturing. That was a major theme in the March edition of the Institute for Supply Management’s (ISM) Manufacturing Report on Business, which was issued today.

The report’s key metric—the PMI—at 49.1 (a reading of 50 or higher indicates growth)—fell 1% from February’s 50.1, halting a two-month run of PMI growth. The March reading was off 0.9% from the 12-month average of 50.0, while the over all economy grew in March for the 131st consecutive month.

ISM reported that 10 of the 18 manufacturing sectors it tracks saw growth in March, including: Printing & Related Support Activities; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; Wood Products; Paper Products; Chemical Products; Computer & Electronic Products; Primary Metals; Miscellaneous Manufacturing; and Plastics & Rubber Products. The six industries reporting contraction in March, in order, are: Petroleum & Coal Products; Textile Mills; Transportation Equipment; Furniture & Related Products; Fabricated Metal Products; and Machinery.

Each of the report’s key metrics saw declines in March.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 7.6% to 42.2, down for the second month in a row. ISM noted this reading represents the lowest monthly reading since March 2009, when it posted a 41.3 reading and added that three of the 18 manufacturing sectors seeing new orders growth for the month.

Production—at 47.7—was off 2.6% and entered into contraction territory, following 50.3 and 54.3 readings in January and February, respectively. The report explained that the decline was driven by a lack of new orders, insufficient backlog, and supplier delivery restrictions that led to reduced production output, with seven of the 18 manufacturing sectors reporting growth.

Employment was off 3.1% to 43.8, contracting for the eighth month in a row. This marked its lowest reading since the 35.3 recorded in May 2009. Only three of the 18 manufacturing sectors reported growth for the month. Supplier deliveries—at 65.0 (a reading above 50 indicates contraction)—marked a 7.7% downward difference from March to February, slowing at a faster rate for the fifth straight month.

March inventories—at 46.9—inched up 0.4% compared to February, while still contracting for the 10th consecutive month. The report said that inventories are expected to grow, due to supply chain disruptions leading to inefficiencies in material conversion and continued advance stocking to protect production schedules. And customer inventories—at 43.4—were up 1.6% over February and remained too low for the 42nd consecutive month.

The ongoing impact of coronavirus on manufacturing was evident in comments from ISM member respondents that were included in the report.

“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,” said a Computer & Electronic Products respondent. And a Transportation Equipment respondent observed that the COVID-19 impact has extended to Europe and North America, stating that the virus escalation is affecting his company’s purchasing and logistics operations, coupled with having incurred air-shipment and production interruptions due to shortages of raw materials and components.

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said that the March PMI number was higher than expected.

“We thought the PMI would be in the 42-to-44 range but it came in at 49.1,” he said. “There was a lot of talk about the supplier deliveries number propping it up, but if it had been a normal supplier deliveries number, at 54 or 55, it still would have gotten the PMI to 47. While there is a monthly PMI, what we may need in these dynamic times is a weekly PMI, because so much has changed in the last seven days that if you are answering the [ISM] questionnaire now compared to seven days ago, the answer would be different.”

With that as a backdrop, Fiore said it is possible that April could see declines for new orders, production, employment, and an easing in supplier deliveries, as demand will not be there, and a mild decline in inventories.

Looking beyond that, should the coronavirus pandemic fade away and business operations return closer to normal, Fiore said that manufacturing is likely to return to typical levels as a fairly slow rate, given that the sector will be releasing millions of employees in the coming weeks. And when they return to work, he said things would not immediately be up and running after an extended absence.

“[Manufacturing] is probably going to grow at about one-third of the rate that it contracted, and that still may be a good thing, as we have never seen a contraction like this,” he said. “I don’t think it is going to be a snap-back. It is going to be a slow gain back. Q2 is lost, and Q3 is going to be weak. A few weeks back, it was thought that Q2 would be positive at this point, with maybe a slow ramp up into Q3. Q4 will be more positive with employment levels stabilized, and factories getting back to some semblance of normality. The ones that are open now are trying to figure out ways to continue the process more safely, and once this thing kind of passes they are going to go back to ways in which they can run things more efficiently, and you are then back into the flu season. That brings concern, too, in terms of what do we do if [coronavirus] comes back in November.” 

Price decline: Manufacturing prices in March—at 37.4—were down 8.5%, falling for the second month in a row and hitting its lowest level since January 2016’s 33.9 reading. Not surprisingly, the majority of prices seeing declines were energy- and oil-related.

Fiore said it is likely this could mark a bottoming, of sorts, for these prices, noting, as an example that oil prices are hovering around $20 per barrel. And he noted copper prices are already low and steel is starting to relax, which translates into GDP growth between 1.5 and 1.8.

“There will be some knockdown effect by an energy drop, with expected declines in plastic pellets a month or two from now,” he said. “Prices may jump back into the 40-to-42 range and still be dropping but not at the same rate.”

When asked about the collective set of manufacturing inputs, which ISM defines as supplier deliveries, inventories, and imports, Fiore said that on the computer side there is still a struggle to get components, leading to weak expansion growth, due to restrictions on getting components made and sourced in Asia. And he said that the transportation sector is likely to have a weak supplier deliveries number for a while, even though the March number was solid.

“The key theme for inputs is that there is not really a need for anything,” he said. “Companies are more inclined to keep cash on hand for the time being.”