April manufacturing output feels impact of COVID-19, reports ISM

While March began to show how the coronavirus, or COVID-19, began to truly impact the economy, things came into even starker perspective in April, based on data in the Institute for Supply Management's (ISM) Manufacturing Report on Business, which was released today.

The report's key metric—the PMI—at 41.5 (a reading of 50 or higher indicates growth)—declined 7.6% from March's 41.5, falling for the second straight month, which was preceded by two months of growth. The April reading was 7.5% below the 12-month average of 49.0 and is also the lowest reading over the last 12 months and the lowest reading going back to April 2009's 39.9. What's more, ISM reported that April marked the first month that the overall economy contracted after a stretch of 131 consecutive months of economic expansion.

ISM reported that two of the 18 manufacturing sectors it tracks saw growth in April, including Paper Products; and Food, Beverage & Tobacco Products. And the 15 industries reporting contraction in April, in order, are: Printing & Related Support Activities; Furniture & Related Products; Transportation Equipment; Textile Mills; Fabricated Metal Products; Nonmetallic Mineral Products; Machinery; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Petroleum & Coal Products; Wood Products; Miscellaneous Manufacturing; Computer & Electronic Products; Primary Metals; and Chemical Products.

Each of the report's key metrics saw declines in April.

New orders, which are commonly referred to as the engine that drives manufacturing, saw a steep 15.1% decline, to 27.1 after a 7.6% decline, to 42.2, in March. This marks the third straight month of declines and is the lowest reading for new orders since December 2008's 25.9. ISM said that two industries—Food, Beverage & Tobacco products and Paper Products—saw growth in April, with the remaining 16 all seeing declines.

Production—at 27.1—was down 20.2%, contracting for the second straight month and is the lowest figure since numeric ISM Report On Business index records were first issued in January 1948, with the 20.2% decrease from March representing the largest one month decline going back to January 1984, when it was down 20.7%. ISM said that two manufacturing sectors—Paper Products and Food, Beverage & Tobacco products—grew in April.

Employment—at 27.5—was down 16.3% compared to March, falling for the ninth consecutive month, and is its lowest reading since June 1949's 27.2 reading, and represents the largest one-month percentage-point decrease going back to January 1948, when ISM began keeping numeric records. ISM said that each of the top six manufacturing sectors saw employment contraction driven by the furloughs and layoffs, due to a lack of new orders, with social distancing mandates also factoring into the number.

April inventories—at 49.7—headed up 2.8%, while contracting at a slower rate for the 11th consecutive month. The report explained that inventory contraction slowed as was expected, due to supply chain disruptions and the lack of labor to convert material, with 10 manufacturing sectors reporting higher inventory readings in April.

And supplier deliveries—at 76.0 (a reading above 50 indicates slower deliveries)—again slowed at a faster rate for the sixth straight month, while coming in at its highest level since January 1974's 82.1. The 11% increase from March to April marks its biggest one-month increase since January 1976, when it was up 12.8%. Backlog of orders—at 37.8—fell 8.1%. contracting at a faster rate for the second straight month.

The ongoing impact of coronavirus on manufacturing was evident in comments from ISM member respondents that were included in the report.

“COVID-19 has created a wave of activities, including vendors closing, vendors focusing only on the medical industry, employees not coming to work, delayed shipments from overseas, ” noted a Transportation Equipment respondent. And a chemical products respondent observed that production has stopped, other than to make hand sanitizer for those in need.

In an interview, Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said that, given the sharp across the board declines in the report, that April could mark a bottoming out, of sorts.

“It was expected, and I was predicting it would be lower, as the market consensus [for the PMI] was 35,” he said. “If the supplier deliveries number, which reflects the difficulties in obtaining material at the supply base caused by the virus, saw a normal decline in which a supply chain would not have been disrupted due to an unusual event, the PMI would have been 37.4.”

And he noted that the inventories number was in line with expectations, due to inefficiencies in the supply chain, with many workers sent home halfway through the month largely for non-essential businesses, leading to inventories never being converted. That development, he said, was a large contributor for the 27.5 production reading, with the new orders number “way off” and reflecting uncertainty, coupled with people working from home and maybe being told to stop having materials delivered until there was better forward looking visibility.

As the manufacturing sector eventually emerges from its COVID-19-related challenges, Fiore said that imports (up 0.6% to 42.7 in April) will eventually go up, with the reason for that largely due to China.

“China was still struggling in the month of April and is expected to be back on pace in May,” he observed. “There have been a lot of comments about China running at relatively high levels, and I think the new export orders number [April fell 11.3% to 35.3], because China is going to be placing orders with U.S. computer manufacturers, and Europe is coming back up, too, and they are going to have to process orders for delivery. And with the backlog of orders being so far down, that kind of shows that there were no new orders coming in and no production going out, which are kind of incredible, in terms of the numbers.

In regards to the coming weeks, Fiore said that many manufacturers are focused on ways in which they may need to restructure factories and operations to maintain social distancing requirements when things come back online.

“There is a natural tension going on between factory floor workers and management about what is safe,” he said. “That is why the automotive business is still down, with unions in Michigan working with the Governor to make sure there is very little risk when workers come back. What that really means is that everyone is going to re-start at around 25% of January's output level and stretch everything out. When you stretch everything out, you don't need as many people. And the only way you can use all of those people is to run multiple shifts. Many companies are already running multiple shifts. There are only 24 hours in a day so what else can you do?”

As an example, he pointed to protein-based manufacturers such as meat processing plants, with workers standing shoulder-to-shoulder on manufacturing lines.

“I am making some assumptions here, but it is very difficult for them to stretch it out for a six-foot gap, and what it probably means is that you are going to produce one-sixth of the output,” said Fiore. “Even if new orders come back, the production number is going to be weak, due to lower output. And the biggest issue is if operations come back too early and there are infections in factories, they will be closed right down again. What this country cannot afford is three more months of being closed down. Compared to everyone else, we are kind of rushing it.”

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