April 29, 2020
The Institute for Supply Management’s Report on Business releases details on the U.S. manufacturing sector on Friday. Economists estimate that the report may show numbers similar to the 2009 crash. The index, based on a survey of U.S. manufacturing companies, has not reflected the extent of the economic damages in previous months, but this month, that is likely to change.
Here are five things to watch for when looking at Friday’s ISM report:
The number will reflect the early impact of the pandemic on manufacturing
While the report is labeled April, the survey is conducted in the first two weeks of the month. Unlike the service sector, which took an immediate hit from shutdowns and accounted for the majority of the jobless claims in March, the manufacturing sector lagged behind. Therefore, economists may look more closely at the non-manufacturing sector this month, where you see most of the impact on GDP.
The economy remains in shutdown
Most economists are estimating the index could drop to a number as low as the mid 30s, similar to that of the 2008 recession, but that does not mean the economic outcome will be the same. If the numbers are as low as expected, economists will hold off until more of the country reopens before drawing any long-term conclusions. It may mean that comprehensive forecasts can’t be drawn until three quarters of the economy has reopened.
“The government proactively chose to shut down much of the country, it is not a reflection of underlying business, but regulation… Until then, good news is welcome, bad news mostly ignored,” Thomas Hayes, Chairman of Great Hill Capital.
The global circumstances are unusually different
While the global pandemic has caused supply chain disruptions, decreased demand for goods and factory shutdowns, not all manufacturers are created (or in this case, creating) equally. Some industries are thriving while others are taking a deep dive, making the numbers in this month’s report less telling about the general economy. Overall, demand for durable and capital goods slowed as consumers and companies feared they would not be able to make future payments. While Food, beverage and paper makers are barely keeping up with demand.
Additionally, the recent trade wars between Saudi Arabia and Russia, piled on top of drops in demand for oil, has impacted manufacturers that support the industry. The effect will hit states differently, causing oil-reliant states to feel the plunge harder. Texas has largely held up most of its manufacturing jobs by managing to keep many of its manufacturing lines open, but while they can control which government regulations will affect them, they are unable to cushion the sector from demand outages.
How U.S. manufacturing companies perform or recover will depend largely or which sector they serve.
The last two month’s reports were superficially high
The headline number in April’s report may seem like a steeper drop from previous months, that is because February and March reports were more positive than most economists expected. The real reason for that was that the supply and deliveries index increased significantly, usually a sign of high demand, signaling economic growth. This time, it was due to global supply chain disruptions caused by the pandemic which led deliveries to take longer, in turn inflating the index.
In March, the deliveries Index increased by 7.7% from the previous month, bringing the headline to 49.1%, just below the growth measurement of 50: Without the inflated index, it would have been closer to 41.1%.
The headline number won’t be as important as some of the indexes
Comprehending this month’s report will mean looking more closely at each index and understanding why the numbers are up or down. Indexes such as new orders and employment, both of which tumbled last month, will be more important than supply and deliveries when gauging where the sector will be in the first three quarters.