The Covid-19 pandemic and oil-market volatility drove the U.S. manufacturing index back into contraction territory in March, as the Institute for Supply Management’s PMI fell to 49.1 from 50.1 the prior month. With 50.0 as the line of demarcation between contraction and growth, new orders at 42.2 percent and employment, at 43.8, are at the lowest levels since 2009.
Overall, the index didn’t decline as much as expected, said Tim Fiore, chair of the ISM’s manufacturing business survey committee. Certain sectors are doing well, such as chemicals, pharmaceuticals and food and beverage. ISM also expects the PMI’s rate of change month to month won’t be that volatile, as manufacturers have figured out what they need to do to keep factories running.
Still, the PMI is in a downward trajectory, according to the ISM. The electronics sector is facing a deficit of raw materials shipped from China, a tech executive told the committee. “We are now seeing revenue impact in that region. Our operations team is reviewing plans for spread of the virus.”
“The two main issues affecting our business [are] Covid-19 and the oil-price war,” said a manager in the chemicals sector. “We are in daily discussions and meeting constantly, updating tracking logs to document high risk concerns.”
Overall, demand slumped in March, with new orders contracting at a strong level, in part pushed by new export order contraction; and the customers’ inventories index remaining at ‘too low’ status, but increasing at a level considered a negative for future production. Backlog is also contracting again, said Fiore, but at a moderate rate.
The backlog of orders index registered 45.9 percent; a decrease of 4.4 percentage points compared to the February reading of 50.3 percent. The production index registered 47.7 percent, down 2.6 percentage points compared to the February reading of 50.3 percent. The employment index registered 43.8 percent, a decrease of 3.1 percentage points from the February reading of 46.9 percent.
Supplier deliveries registered 65 percent, up 7.7 percentage points from the February reading of 57.3 percent. A lengthening in suppliers’ delivery time is usually associated with increased activity, which would normally be positive. In this case, however, slower supplier deliveries indicate supply shortages rather than stronger demand.
“Comments from the panel were negative regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (Covid-19) pandemic and energy market volatility,” said Fiore. In fact, optimism was higher at the beginning of March but markedly declined toward the end.
However, Fiore does not expect the PMI’s rate-of-change to be overly volatile in the coming months and that some manufacturing sectors will return to stability. “I think the manufacturing industry has figured out which factories to close, optimum capacity for those that are running, and the number of employees they’ll need,” he said.
China is in recovery, Fiore added, and the EU will recover more quickly than the U.S. “We still have the ability to export, and those nations will restock with U.S. products.”
Unfortunately, the U.S. Defense Production Act (DPA) , which shifts manufacturing capacity from consumer goods to critically-needed gear such as face masks, personal-protection equipment (PPE) and ventilators, won’t be a shot in the arm for domestic manufacturing. Factories that have been able to respond to PPE demand already have, Fiore said, and planning for the distribution of finished products has not been effective.
“What you really need is a coach [in the middle between finished goods and demand],” he said, “so in this case I don’t think the DPA will help anything.”
The U.S. manufacturing has also changed significantly since the DPA was enacted during World War II. The supply chain is now global, and factories have moved to just-in-time manufacturing, build-to-order, and lean. “Lean factories have equipment that can be rearranged, but not so that employees are six-feet apart,” said Fiore. “Most of those have shut down.”
The U.S. also depends on China for a lot of PPE, and China can sell its products anywhere. “Either we have to do better with our national stockpiles, or the domestic manufacturing industry will have to make a comeback,” Fiore said. “There has to be a real assessment of what the manufacturing industry has experienced over the past 30 years.”