IHS Markit’s gauge of services activity in the US was revised slightly higher for March to 39.8 from 39.1 in the flash reading, but it’s still the lowest print in series history and represents a truly incredible 15.5-point decline from a year ago, and a 10-handle drop from February.
New business fell to 40 from 50.2 the previous month. That’s the lowest reading on record.
“US service providers registered the steepest decline in business activity since data collection began ten-and-a-half years ago in March as the coronavirus pandemic led to business closures and sharply reduced client demand for services from both businesses and households”, IHS Markit said, in the press release.
“The survey indicates that the economy contracted at an annualized rate approaching 5% in March, but with more measures to fight the virus outbreak being taken this decline will likely be eclipsed by what we see in the second quarter”, chief economist Chris Williamson remarked, stating the obvious, and adding that “more nonessential businesses are being forced to close, some are going bust, and lockdowns are leading to vastly reduced consumer spending”.
Meanwhile, the headline on ISM’s non-manufacturing gauge for March is a deceptive 52.5.
That marks a steep drop from 57.3 in February and is the worst print since August 2016, but it’s far better than consensus (43) and is distorted by the same factors that artificially inflated its manufacturing counterpart. Here’s what’s going on, as explained by ISM:
The Supplier Deliveries Index registered 62.1 percent, up 9.7 percentage points from the February reading of 52.4 percent. This is the highest reading since August 1997, when the index registered 71.5 percent [and it] limited the decrease in the composite NMI. Deliveries is the only ISM Report On Business index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases. However, the high percentage-point increase in March – the largest monthly change since an 18.5-point decrease in September 1997 – was primarily a product of supply problems related to the coronavirus (COVID-19).
So, just as you can look to new orders and employment on ISM manufacturing to get a better read on the “real” situation, stripped of the deliveries distortion, you can look to the employment gauge on ISM non-manufacturing for a more accurate representation of the services sector.
“Employment activity in the non-manufacturing sector contracted in March after 72 consecutive months of growth”, ISM says, noting that at 47, the gauge is now at the lowest in more than a decade. The 8.6 point drop from February is the largest since November 2008.
“The ISM non-manufacturing index remained in growth territory in March… but this bears little reflection of reality since it was all down to supplier delivery times”, ING said, in an e-mailed note.
“Inventories [are] negatively impacted by finished goods from China”, respondents said, in the color explaining the 12.4-point decline in the inventories gauge. “[We’re] trying to get as much as we can to get us through the coronavirus”.
Comments from the color accompanying the employment component include respondents reporting “layoffs due to [the] virus and decreas[ing] revenue”. “Most employees have been asked to telecommute; there is a hiring freeze until everyone returns to the office”, another respondent said.
In case you need more evidence that the virus is all that currently matters, below are some additional comments from the ISM survey, which I’ll present without further comment.
WHAT RESPONDENTS ARE SAYING
- “Significant shortages of personal protective equipment (PPE), chemical reagents, test swabs and other basic medical supplies persist. Extreme sourcing measures are required to procure necessary supplies for basic operations. Distributor allocations continue across the board.” (Health Care & Social Assistance)
- “Severe impact to operations as a result of COVID-19. Major challenges in obtaining needed supplies for first responders, including N95 masks, gowns, disinfecting products and medical supplies. As a local government, we are experiencing a significant increase in activity due to emergency-response efforts. Starting to experience inappropriate price increases for short-supply items.” (Public Administration)
- “Significant demand disruption caused by the coronavirus.” (Accommodation & Food Services)
- “The coronavirus is having an impact, but not as much as we thought it would at this point. All sectors are staying busy. Although there are many customer concerns, we are finding work-arounds and adapting to the ever-changing situation.” (Construction)
- “COVID-19 shelter-in-place order in effect. Offices closed except for essential personnel.” (Educational Services)
- “Like most businesses, we cannot fully project how the coronavirus will impact us. By displaying prudence and avoiding panic, we are trying to navigate this crisis. As human capital is our greatest expense, protecting that capital is job one. Supply chains are overstressed and will normalize only when the panic subsides.” (Information)
- “COVID-19 has greatly impacted daily operations. All staff personnel are telecommuting, and customer concerns have shifted from normal activities to preventative measures.” (Management of Companies & Support Services)
- “We are experiencing no real issues from a business perspective, although COVID-19 has forced us to reconsider elements of how our workforce gets things done.” (Mining)
- “As expected for many industries (whether manufacturing or non-manufacturing), purchasing has slowed as we evaluate the economic climate and prepare for long-term effects.” (Retail Trade)
- “The coronavirus is effecting every aspect of business.” (Real Estate, Rental & Leasing)
