U.S. manufacturers are still projecting growth even as the coronavirus is creating economic uncertainty.
February’s Institute for Supply Management’s Report On Business, an index that monitors monthly changes in manufacturer’s production levels, registered at 50.1, a 0.8% drop from January’s 50.9. Employment continued to grow by 0.3%, even as new orders were down 2.2% from the previous month. The highest decrease was the imports index by 8.7%. While the backlog orders index posted the highest increase at 4.6%.
“This month’s US economic data just misses the period where the economy really rolled over,” said economist Bill Jordan of ICAP North America. The survey, a reflection of the early part of February, was two weeks too early, scarcely missing the coronavirus’ drag down of financial markets.
February’s report showed early signs of complications for manufacturers as supply chain backups caused by the novel virus began to surface. Yet, optimism remains among business owners that the impact will be short lived, leaving economists reluctant to draw long-term conclusions from this month’s data.
The supplies and deliveries component made headlines for its jump this month, generally a sign of increased demand signifying economic growth. This time, it has an opposite effect, indicating supply chain backup due to factory shutdowns in China. The component added 0.9% to the overall number. Subtracting that component would bring the ISM down to 49.2 said Oscar Munoz from TD Securities.
The general mood among economists is that the coronavirus will wind down before any real damage is done. Factories in China have gradually begun to fire up their factory lines and U.S. companies are well stocked to deal with the temporary supply backup. “Companies will begin to work through their inventories in the next month or two before severe supply chain issues begin to surface,” said economist Jay Bryson from Wells Fargo Securities.
Zavi Cohen, owner of Zvetco, a biometrics manufacturer that creates fingerprint technology to safeguard data, is experiencing supply chain issues. His company is dealing with shortages of metal supplies imported from China, a key material incorporated into their electronics. The backup hurt sales on fingerprint operated safes. Additionally, new products the company plans to introduce will be released later than scheduled. Cohen fears his company may not be able to reach its 2020 projected sales target.
Yet, he remains optimistic with the news of China’s factories reopening. “We are still hoping to be in good shape as long as things don’t deteriorate any further,” said Cohen. “Long term shutdowns would mean we would have to diversify the supply chain and go to other places like Vietnam, Thailand or India.”
Cohen is not alone, 60% of North American manufacturing companies have been affected by the coronavirus according to a new survey from the Thomas Survey Reports.
The trade deal reached in December between the U.S. and China did not cushion the negative impact from the virus. The sector initially reacted to the trade truce by ramping up, purchasing more supplies and increasing hiring. As reflected in January’s PMI which showed a peak 3.1% increase from December, before plummeting back down this month.
“People who claimed [the trade deal] was good news were just looking for something good to say when it was still bad. Some companies may have reacted positively but it’s small potatoes because tariffs were still in place and the tough parts of the negotiations weren’t done, like access to the Chinese market.” Said Jordan.
Gauging the impact of the trade deal may have to wait until China overrides the effects of coronavirus. At this point, the deal happened and shortly after, China shut down.