In April, the combined effect of the coronavirus and oil price wars affected economies globally, with an expected deterioration in economic activity, impacting both leading and lagging indicators such as indices for manufacturing and services and employment reports. The Purchasing Managers' Index (PMI) came in at a reading of 41.5 in April 2020 which was a large drop from March's reading of 49.1. This reading represents the second straight month of contraction for manufacturing with a value over 50 indicates expansion and a value under 50 indicates contraction.
Interesting to note is that the US economy as a whole is contracting following 131 consecutive months of expansion. In 2019, even when manufacturing was contracting, services were expanding. This is no longer the case as markets also saw services contracting in April 2020. The only industries that performed well were paper, food, beverage and tobacco products.
This is not surprising considering that consumers were hoarding basic necessities and essentials. Looking ahead, unless coronavirus cases clear, most industries will remain slow. With that said, restrictions are starting to ease in some states which should possibly bode well for future PMI readings.
More specifically, the collapse of oil prices has punished the energy sector as oil rigs were taken out of service and production slowed. The automotive industry stopped production. Companies in these two industries have a large ripple effect on many others. Oil prices continue to stay depressed and automotive production has not yet fully restarted. It is unlikely that these two sectors will recover to the same activity level at the start of the year in the foreseeable future. This will have a cascade effect on suppliers and service providers to these two large industries.
The only sub-indices for the PMI that have not seen a contraction include supplier deliveries, inventories, customer inventories, and imports which exhibited a positive percentage change. This is likely due to some stocking up and also points to the decline in production and orders.
In addition, the current ISM Non-Manufacturing Index (NMI) reading is now at 41.8 in April 2020. This is the first contraction after 122 consecutive months of growth. One can see that all the sub-indices except supplier deliveries and Prices are contracting.
The increase in prices suggests that inflation is creeping into the market, which may come as a surprise to some given that demand is down. However, it is the result of supply limitations, plant shutdowns, and transportation restrictions. Note that business activity dropped by 22.0 and is now even lower than production in manufacturing. That said, many retail stores, theatres, sport venues and other similarities remained closed even though there are plans to reopen in the next several weeks. Given that other countries have eased lockdowns with a slightly uptick increase in cases, the opening of such leisure activities might ultimately be unlikely. Hence, May is another month expected to have a weak NMI reading.
Finally, the worst jobs report was seen in April with a headline number of 14.7 per cent, a record breaker in the current dataset from 1948 – 20 million people lost jobs from mid-February to mid-April. Of particular concern, the labour force participation rate is down to 60.2 per cent levels not seen since the 1970s. Nonfarm payrolls dropped at the fastest ever rate, 14 per cent unadjusted. Further to that, through May 2, another 6.3 million people applied for unemployment insurance, and markets are expecting more to apply throughout the month of May.
On a conclusive note, it is clear that the US economy will experience a contraction following the unprecedented situation. Companies of all particular sizes in the manufacturing and non-manufacturing sector have shut operations for at least one month or longer which resulted in an unprecedented loss of over 20 million jobs in a few weeks.
The recovery path seems to be painful and indeed maybe consumers will play an important role in the economic recovery. A positive now is the emphatic role brought forward by both the US government and the Federal Reserve, which continue to support the economy through several aid packages.
Disclaimer: This article was issued by Maria Fenech, credit analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.