U.S. Supply Execs Prepare Grim Forecast for 2020

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U.S. purchasing and supply executives expect the nation’s economic downturn will continue for the rest of the year as the Covid-19 pandemic obscures forecasts in the manufacturing sector. Factory revenue is expected to drop 10.3 percent in 2020 --  down 15.1 percent from December 2019 forecasts.

The manufacturing and services sectors are both signaling contraction as employment, capital expenditures and operating capacity decline across the board, according to the Institute for Supply Management.

The ISM’s factory index, the PMI, in April fell to levels not seen since 2009. The index dropped 7.6 percent, from 49.1 in March to 41.5. Any reading above 50 indicates growth; below 50 signifies contraction.

In its manufacturing semiannual forecast, the ISM reports:

• Operating rate is currently at 75.9 percent of normal capacity.
• Production capacity is expected to decrease 3.6 percent in 2020.
• Capital expenditures are expected to decrease 19.1 percent in 2020.
• Prices paid decreased 2.8 percent through May 2020.
• Prices of raw materials are expected to decrease a total of 1.6 percent for all of 2020, indicating an expected increase of 1.2 percent in prices for the remainder of the year.
• Manufacturing employment is expected to decrease by 5.3 percent by the end of 2020.
• Manufacturing revenue is expected to decrease 10.3 percent in 2020.
• Overall, manufacturing is expected to shrink in 2020.

The computer and electronics sector, which contracted in April, remains stable compared with other industries, said Tim Fiore, chair of the ISM’s manufacturing survey committee.

“In April, it did contract, but moderately if you look at the sub-indexes. Backlog was good, and supplier deliveries were high, but [the industry] is still struggling to get piece parts from China. Orders were down, but they might tick up again once supply issues are resolved. Overall, [electronics] did not contract as strongly as other sectors -- and that’s a short step to expansion.”

Production capacity and employment are a mixed bag for the U.S. and its trading partners. A 5.3 percent drop in employment was less than expected, said Fiore; capacity is forecast to decline 3.6 percent.  The U.S. is preparing to re-open factories that were closed due to Covid-19, but manufacturing relies on the global supply chain.

China is likely at a 75 percent production level, said Fiore, but Mexico stopped and re-started its automotive ramp-up in a matter of days.

“If the U.S. and Mexican automotive supply chains aren’t aligned,” said Fiore, “the schedule won’t make a lot of difference.”

Mangers are deploying factory workers differently as they seek to protect employees’ health. “Restarting the manufacturing base is going to take longer than normal,” Fiore said. “The U.S. intention is  to send 25 percent of employees back to work; then 35 percent, 45 percent and 50 percent – and the effectiveness of that scaling has not yet been proven. There are limits as to how many people you can put in a factory.”

Manufacturing capex, which was expected to decline this year, fell deeper than expected. Survey respondents forecast a 19.1-percent decrease in capital expenditures in 2020; lower than the 2.1-percent decrease predicted in December 2019. Only 10 percent of respondents predict increased capital expenditures in 2020, averaging 26.5 percent; 56 percent said their capital spending would decrease at an average 38.7 percent.

Revenue expectations are equally grim. 2020’s forecast of a 10.3 percent decline is 15.1 percentage points lower than the 4.8-percent increase anticipated last December. “With operating rates at 75.9 percent; a capex decrease of 19.1 percent; a decrease of 1.6 percent for prices paid for raw materials; and employment [dropping], manufacturing has been negatively impacted by the coronavirus pandemic,” said Fiore.

High-tech trade concerns

Major developments in the electronics industry were not baked into the forecast but will nonetheless impact the trade balance for the rest of the year. On Friday, Taiwan-based fab company, TSMC, announced it would open a manufacturing center in Arizona, adding jobs to the U.S. economy. The same day, the U.S. Department of Commerce moved to block semiconductor shipments to China’s Huawei Technologies, a major consumer of U.S. chips.

Huawei became the world’s third-largest semiconductor buyer in 2018, according to Gartner, and almost half its $100 billion revenue is derived from foreign markets.

“There’s a lot going on regarding trade that is very concerning,” Fiore said. “It’s very complicated and things have moved beyond tariffs on Chinese-made products. China is unlikely to buy U.S. pork because protein plants are closed; soybean consumption won’t reach anticipated levels; and even airplanes won’t get bought. Things are getting confrontational, and trade is not heading in the right direction.”

In the non-manufacturing sector, ISM reports:

• Operating rate is currently 73.3 percent of normal capacity.
• Production capacity is expected to decrease 2.8 percent in 2020.
• Capital expenditures are expected to decrease 13.4 percent in 2020.
• Prices paid increased 4 percent through May 2020.
• Prices of raw materials are expected to increase a total of 3.9 percent for all of 2020, indicating an expected decrease of 0.1 percent in prices for the remainder of the year.
• Non-manufacturing employment is expected to decrease 3 percent during the rest of 2020.
• Non-manufacturing revenue is expected to decrease 10.4 percent in 2020.
• The non-manufacturing sector is projected to shrink in 2020.

The ISM’s full report is available here.