ISM Manufacturing Hangs Tough, But Virus Concerns Are Pervasive

ISM manufacturing printed in expansion territory for the second consecutive month, which comes as something of a relief after IHS Markit’s PMIs came in woefully below expectations for February in what was generally viewed as an early indication that the US economy will not be spared from the coronavirus fallout.

ISM’s factory gauge printed 50.1 for February, slightly lower than expectations (50.5) and down from 50.9 in January.

Production fell pretty sharply, new orders dropped into contraction and the imports index printed 42.6, representing an 8.7-percentage point decrease. “Comments from the panel were generally positive, with sentiment cautious compared to January”, the report reads. “Demand slumped, with the New Orders Index contracting at a weak level, despite new export order expansion”.

Of course, the market is likely to take most of the incoming data with a grain of salt – at least for another couple of weeks, until traders can be some semblance of confident that the effects of the various COVID-19 containment measures adopted around the world are being reflected in the numbers.

The commentary from ISM respondents betrays palpable consternation in some corners. Consider this, for example, from the computer & electronic products perspective:

There are always supply chain challenges with Lunar New Year shutdowns, and this year is no different. Coronavirus is wreaking havoc on the electronics industry. Companies are delayed in starting up production, which is resulting in longer lead times, constraints and increased pricing. It’s a mad dash to dual source stateside in case China isn’t back online soon.

And then there’s this from folks in the fabricated metal products community:

Coronavirus continues to be front and center as a major supply chain risk to our company. Access to information in China – from our supply base and customers – is slow to come by.

As you’ll read below, it’s not all bad, but the virus is certainly front and center in the minds of many US manufacturers.

The question, ultimately, is how persistent these concerns prove to be, and, of course, the extent to which they affect the US services sector, which, on IHS Markit’s read anyway, fell into contraction for the first time in four years in February.

As you can see, consumer sentiment has yet to take a hit – that’s either encouraging, or terrifying, depending on how you want to look at things.

From ISM

WHAT RESPONDENTS ARE SAYING

• “There are always supply chain challenges with Lunar New Year shutdowns, and this year is no different. Coronavirus is wreaking havoc on the electronics industry. Companies are delayed in starting up production, which is resulting in longer lead times, constraints and increased pricing. It’s a mad dash to dual source stateside in case China isn’t back online soon.” (Computer & Electronic Products)
• “January started out strong, but the effects of the virus in China [and] the continued grounding of the 737 Max have suppressed new orders. We are still expected to be flat to slightly up [year-over-year] for 2020 sales, based on those issues.” (Chemical Products)
• “Layoffs are here.” (Transportation Equipment)
• “Coronavirus and its impact on the supply chain: We will see some softness in demand, but also [experience] havoc on items sourced from China that may cause significant delays to production.” (Food, Beverage & Tobacco Products)
• “Energy markets seem to be responding to a potential drop in demand that may be related to responses [to] the coronavirus.” (Petroleum & Coal Products)
• “Coronavirus continues to be front and center as a major supply chain risk to our company. Access to information in China – from our supply base and customers – is slow to come by.” (Fabricated Metal Products)
• “Sales continue to be strong, with the supply base able to support as required. The major concern is the China virus and what that crisis could affect in getting parts. The company is putting plans in place to source out locations, especially in the U.S., for parts.” (Machinery)
• “Business continues to be strong. We had a little January slowdown, but February has been fantastic.” (Plastics & Rubber Products)
• “We have seen an increase of sales for our products.” (Furniture & Related Products)
• “Current favorable forecast to budget for first-quarter sales.” (Primary Metals)

MANUFACTURING AT A GLANCE
FEBRUARY 2020