Manufacturing Sector Plummets in April – Robert Hughes (05/04/2020)

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell to a 41.5 percent reading in April, down from 49.1 percent in March. The April result is the second month in a row below the neutral 50 threshold (see top chart). Overall, the report notes, “Comments from the panel were strongly negative (three negative comments for every one positive comment) regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) 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.”

Many of the key components of the Purchasing Managers’ Index have already fallen to levels not seen since the lows of the Great Recession in 2008-09. The New Orders Index came in at 27.1 percent, down from 42.2 percent in March and the lowest since December 2008 (see top chart). The results suggest production as measured by the Federal Reserve’s industrial production for manufacturing index may show steep declines in the coming months. The New Export Orders Index came in at 35.3 percent in April, down 11.3 percentage points from a 46.6 percent result in March.

The production index was at 27.5 percent in April, down from 47.7 percent in March and a new record low since the survey began in 1948 (see bottom chart). The backlog-of-orders index came in at 37.8 percent in April, down from 45.9 percent in March and suggesting a second month of decline in backlogs.

The employment index fell 16.3 percentage points to 27.5 percent in April, versus 43.8 percent in March, and the lowest reading since June 1949 (see bottom chart). The move farther below neutral suggests employment in manufacturing likely fell sharply in April. The Bureau of Labor Statistics’ Employment Situation report for April is due out on Friday, May 8. Consensus expectations are for a shockingly large loss of more than 22 million nonfarm-payroll jobs including a drop of 1.6 million jobs in manufacturing. The unemployment rate is expected to jump to 16.1 percent from 4.4 percent in March.

Supplier deliveries, a measure of delivery times from suppliers to manufacturers, jumped for the third consecutive month, reaching 76.0 percent, up from 65.0 percent in March. April was the highest reading since April 1974. Slower supplier deliveries are usually consistent with stronger manufacturing activity. However, the slower deliveries in April was more a result of supply chain and logistical constraints. According to the report, “Suppliers continue to struggle to deliver, at a much stronger rate compared to March. The COVID-19 pandemic was the primary cause of global and domestic supply chain disruptions, with suppliers impacted by plant shutdowns, transportation challenges and the continuing difficulty in importing parts and components.”

The prices index fell 2.1 percentage points to 35.3 percent in April from 37.4 percent in March, and the lowest since January 2016. Weaker prices were reported for scrap steel, other steels, aluminum, copper, corn, distillates and other energy sources.

Customer inventories in April are still considered too low, with the index remaining below 50 at 48.8 percent versus 43.4 percent in the prior month (index results below 50 indicate customers’ inventories are too low). The index has been below 50 for 43 consecutive months.

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