U.S. factory output in April accelerated its slide into contraction, falling to levels not seen since 2009. The Institute Supply Management’s (ISM) PMI dropped 7.6 percent -- from 49.1 in March to 41.5. Any reading above 50 indicates growth; below 50 signifies contraction.
In the computer and electronics segment, one executive reported a 30 percent decrease in April due to Covid-19. Both customers and suppliers were impacted.
“The coronavirus pandemic and global energy market weakness continue to impact all manufacturing sectors for the second straight month,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “Among the six big industry sectors, food, beverage & tobacco products remains the strongest. Transportation equipment and fabricated metal products are the weakest of the big six sectors."
New orders in April dropped by 15.1 percent, to 27.1, from 42.2 percent in March. Backlog decreased 8.1 percent to 37.8; employment dropped by 16.3 percent; and deliveries increased 11 points to 76.0.
Overall, the PMI performed better than expected, Fiore said, as trends in the supply chain offset one another.
“Inputs — expressed as supplier deliveries, inventories and imports — strengthened again due to supplier delivery issues that were partially offset by continuing imports sluggishness,” he said. “The delivery issues were the result of disruptions in domestic and global supply chains, driven primarily by supplier plant shutdowns. Inventory contraction slowed due to throughput issues.”
While longer lead times can often indicate elevated demand, the highest supplier deliveries index since 1974 [Bloomberg data] reflects virus-related disruptions in supply lines and factory closures.
New exports registered 35.3 percent, an 11.3 point drop from March’s 46.6 percent. Factory imports reached 42.7 percent, a 0.6-percentage point increase from the March level of 42.1 percent.
Comments from the panel were strongly negative, Fiore said -- three negative comments for every positive -- regarding the near-term outlook. Sentiment is clearly impacted by the coronavirus pandemic and continuing energy market recession.
The PMI indicates a level of manufacturing-sector contraction not seen since April 2009, with a strongly negative trajectory, he said. Demand shrank heavily, as new orders dropped by double digits, pushed by new export order contraction. Customer inventories are approaching a level that is considered a negative for future production; and backlog contracted -- in spite of a lack of production during the period.
However, the ISM believes the PMI has hit bottom. “I don’t think we’ll see much more of a decline,” said Fiore. “We can see the damage that has set in from consumer confidence levels – people are not likely to invest in durable goods as long as they are unemployed or their jobs are in jeopardy. The pace [of Covid-19 outbreaks] has slowed down a little, but we have to watch what happens in Tennessee and Florida.”
Both states are reopening businesses following quarantine, and Tennessee is a hub for manufacturing and logistics.
China is emerging as a bright spot for the electronics industry even as the Americas and the EU struggle. The world’s two largest electronics distributors, Arrow Electronics Inc. and Avnet Inc., indicated during their recent earnings calls that business in China is picking up as factories reopen. In February, Arrow saw its China business come to a halt. "In March, factories began returning to full capacity,” said Arrow CEO Mike Long.
Some U.S. factory sectors have seen a boost due to heightened demand for personal protection equipment (PPE).
“The company I work for manufactures personal protective equipment [PPE], specifically N95 masks, face shields, as well as selling protective clothing and hand protection,” an executive told the ISM. “In the area of PPE, our backlog has spiked to numbers we have never seen. While no doubt some of the back orders will be canceled, many of the orders are longer term commitments from [the] U.S. government.”
But paper products are already seeing signs of a slowdown, indicating coronavirus-related spikes are unlikely to be sustained.