Thursday, April 2, 2020
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Supply chain problems ‘saved’ manufacturing data
The U.S. economy has come to an abrupt halt.
Data revealing the full extent of this damage isn’t likely for a month or two.
And even the most recent pieces of data that capture some of the post-coronavirus economy we’re living in now still contain quirks that are flattering these results. And in turn making the bleak economic situation appear better than it really is.
On Wednesday, the Institute for Supply Management and IHS Markit both released manufacturing activity gauges for the month of March. For these PMI reports, any reading above 50 indicates expansion while readings below indicate a contraction in economic activity; both headlines indexes came in below 50 for March.
As expected, these reports showed a contraction in activity last month. The IHS Markit headline index fell to 48.5, while the ISM’s index hit 49.1. IHS Markit’s PMI data revealed the sharpest drop in output and new orders since 2009.
The ISM data, however, was propped up by a surge in supplier deliveries that were a result of problems related to the coronavirus. And this number held up the headline index and avoided what would’ve been an otherwise ugly drop in activity.
“Supplier deliveries is the only [ISM] index that is [inverted] — a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “However, the high index reading in March was primarily a product of coronavirus-related supply problems.”
Each of the ISM’s nine other sub-indexes aside from suppler deliveries indicated contraction in March.
“The headline index in March was flattered by a lengthening in supplier deliveries times, with that sub-index rising to 65.0 from 57.3,” said Michael Pearce at Capital Economics.
“That boosts the ISM because it is usually a sign of stronger demand. In this case, however, it is really a negative since it reflects supply chain disruption caused by the lockdown in China.”
Jesse Edgerton, an economist at JPMorgan, said Wednesday, however, that these two reports still paint a somewhat more optimistic economic picture than recent regional Fed surveys. With a strong emphasis on somewhat.
Aside from supplier deliveries surging, “the other details of the surveys could have been worse,” Edgerton writes.
“These are sizable declines to be sure, but they are not as dramatic as those seen in some of the regional manufacturing surveys from the Federal Reserve,” Edgerton adds.
“Our model of the risk of recession within one year actually fell back somewhat from yesterday’s 100%, as the message from today’s surveys was not as dire as the data on unemployment claims received last week. Nonetheless, we continue to believe that a recession almost certainly started in March, and we expect the economic data to continue deteriorating as we enter April.”
Later this morning, we’ll get the latest weekly reading on initial jobless claims. After last week’s shocking report that revealed 3.3 million workers filed for unemployment insurance, Wall Street is forecasting there were another 3.5 million initial filings for unemployment this week. And on Friday, the March jobs report is expected to show job losses of at least 100,000.
But as Edgerton notes, the data are likely to get worse.
And unfortunately we’ve still seen nothing yet.
What to watch today
8:30 a.m. ET: Trade Balance, February (-$40.0 billion expected, -$45.3 billion in January)
8:30 a.m. ET: Initial Jobless Claims, week ended March 28 (3.7 million expected, 3.283 million prior); Continuing Claims, week ended March 21 (1.803 million prior)
9:45 a.m. ET: Bloomberg Consumer Comfort, week ended March 29 (59.7 prior)
10 a.m. ET: Factory Orders, February (0.2% expected, -0.5% in January)
10 a.m. ET: Durable Goods Orders, February final (1.2% expected, 1.2% prior); Durables excluding Transportation, February final (-0.6% expected, -0.6% prior)
7 a.m. ET: Walgreens Boots Alliance (WBA) is expected to report earnings of $1.50 per share on $35.30 billion in revenue
Other notable reports: CarMax (KMX)
4:15 p.m. ET: Chewy (CHWY) is expected to report a loss of 16 cents per share on $1.35 billion in revenue.
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