Manufacturing up in February but coronavirus impact looms, says ISM

While the coronavirus continues to have to global economy on edge, manufacturing output grew in January, for the second straight month, following a five-month stretch of declines, according to data issued by the Institute for Supply Management (ISM) in its Manufacturing Report on Business, which was issued today.

The report’s key metric—the PMI—checked in at 50.1 (a reading of 50 or higher indicates growth) in February, down 0.8% from January’s 50.9 reading. January was 3.1% ahead of December, which marked the lowest PMI reading going back to June 2000’s 46.3. The overall economy grew in February for the 130th consecutive month. The February PMI is 0.4% below the 12-month average of 50.5.

ISM reported that 14 of the 18 manufacturing sectors it tracks saw growth in February, including: Food, Beverage & Tobacco Products; Plastics & Rubber Products; and Computer & Electronic Products. The nine industries reporting a decrease in employment in February, in the following order, are: Petroleum & Coal Products; Paper Products; Primary Metals; Textile Mills; Transportation Equipment; Machinery; Miscellaneous Manufacturing; Fabricated Metal Products; and Chemical Products. Six industries reported no change in February compared to January.

The report’s key metrics were mixed in February.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 2.2% to 49.8, on the heels of a 4.4% gain in January to 52.0 (its highest reading since July 2019’s 51.1), which snapped a five-month stretch of declines. The five-month stretch of declines prior to January was preceded by 43 consecutive months of growth over which time it had a cumulative average of 58.5. Sixteen of the 18 manufacturing sectors in the report saw gains in February new orders.

Production—at 50.3—fell 4% below January’s 54.3, which halted five months of declines, for its best reading since April 2019, which also came in at 54.3, with 12 of the 18 manufacturing sectors reporting growth in February. Employment eked out a 0.3% increase to 46.9, slowing for the seventh consecutive month, with three manufacturing sectors reporting employment growth. Supplier deliveries—at 57.3 (a reading above 50 indicates contraction)—marked a 4.4% downward difference from January to February, slowing at a faster rate for the fourth straight month.

February inventories—at 46.5—fell 2.3% to 46.5, down for the ninth consecutive month. This represented the lowest level since September 2019, when it came in at 46.3. Customer inventories—at 41.8—slipped 2%, falling for the 41st consecutive month, and backlog of orders—50.3—headed up 4.6%, showing growth after a nine-month stretch of declines.

The coronavirus was a prevalent theme in comments submitted in the report by ISM respondents.

“There are always supply chain challenges with Lunar New Year shutdowns, and this year is no different,” said a computer & electronic products respondent. “Coronavirus is wreaking havoc on the electronics industry. Companies are delayed in starting up production, which is resulting in longer lead times, constraints and increased pricing. It’s a mad dash to dual source stateside in case China isn’t back online soon.”

A food, beverage, and tobacco products respondent said coronavirus is impacting supply chain operations, with softness in demand, coupled with experiencing havoc on items sourced from China that may cause significant delays to production. And a fabricated metal products respondent observed that coronavirus is front and center as a major supply chain risk, with access to information in China, from the respondent’s supply base and customers, “slow to come by.”

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said February was a stable month for manufacturing, from the standpoint of demand and consumption, relative to January.

“It was essentially the same demand outputs [new orders, customers’ inventories, and backlog of orders] that we had seen in January,” he said. “The input side [supplier deliveries, inventories, and imports] was a bigger story and contributed positively to the PMI, offsetting the negativity from the declining expansion numbers for demand in consumption [production and employment] from January. That was primarily driven by the supplier delivery number that clearly indicates suppliers are having more difficulty delivering. The story is that everything is moving very fast, and timing of information is critical.”

What’s more, Fiore said that the manufacturing sector has transitioned from a price-impacting tariff-counter tariff environment to a supply-access issue environment that is much more dangerous for the economy than tariffs were. The reason for this, he explained, was that tariffs are financial and manufacturers still had their source of supply if they wanted, but they just had to pay more.

“This situation is more around ‘what I do know and what I don’t know and what am I going to do about it,’” he said. “It is very dynamic. Forty two percent of our comments [in the report] were cornonavirus-related, and 18% were from respondents already experiencing issues, and 24% of them were people who were expecting issues, including companies that could not get information; that is a pretty dramatic number, up from 2.5% in January.”

And he added that manufacturing is currently facing input-driven impacts around coronavirus, primarily in China, with the expectation that this month that will spread out to probably Europe and that is expected to show up in the report’s demand numbers in April through June.

“If we don’t get anything new on this by mid-April, I could see Q3 and Q4 be pretty good growth quarters,” he said.

But he noted that this comes with the caveat there could be a backlog for industrial products, with consumer products potentially translating to empty shelves by April. That is driven by the timing of the Lunar New Year and the full end of demand to support the fact that factories were off for two weeks.

“If the quantity of people that are infected is not capped out by mid-April and we don’t see that number start to come down in the areas that are being impacted significantly, then it is going to a large scale impact for the whole supply chain,” he said.

In addition to that, Fiore cited three related factors from the report, including:
-import are at their lowest level in many years—at 42.6—down nearly 9% from January, indicating there are supply chain issues;
-prices fell almost 8% to 45.9; and
-the backlog of orders number jumping up to over 50, at 50.3, which Fiore says supports the fact that manufacturers did not have everything they needed ship the products they could ship, which, in turn, drove down the customers’ inventories number down