Growth in the manufacturing economy slowed last month while threats continued to loom over supply chains.
The Institute for Supply Management’s monthly index fell 0.8% to 50.1%. February was the second month in the past seven months with an index above 50%, which indicates growth in the manufacturing economy.
This indicator signals expansion, but the manufacturing sector is caught in a cross current between positive effects of eased trade tensions with China, and negative effects from the coronavirus. Economists are unsure how the coronavirus will continue to impact the manufacturing economy, which accounts for roughly 11% of the total U.S. economy.
“I view it as a disappointing report,” said Michael Moran chief economist at Daiwa Capital Markets. “It was about 50%, which you might view as favorable, but it was down from the prior month. And if you focus on key components, they pretty much all had a soft tone.”
Although the ISM reported an increase in the employment index by 0.3 percentage points to 46.9%, key statistics did fall. The new orders index fell by 2.2 percentage points to 49.8%, as well as the production index, which fell 4 percentage points to 50.3%.
February’s ISM report followed January’s report, which showed promise in manufacturing for the first time in nearly a year after trade tensions eased with China. This month’s report is likely lopsided between positive effects from the trade deal in the first half and negative effects caused by the coronavirus in the second half. However, the data to see how the PMI index changed from week to week is not provided in the report.
“Coronavirus is wreaking havoc on the electronics industry,” said an electronics executive surveyed for the ISM report. “Companies are delayed in starting up production, which is resulting in longer lead times, constraints, and increased pricing.”
Out of the 18 industries, 14 still managed to grow in February. Furniture fell from first to second-most growth this month, while wood products expanded most. Petroleum and coal, transportation equipment, and nonmetallic mineral products all contracted.
“The bottom line is we really haven’t seen the coronavirus effect yet,” said Robert Brusca the president of Fact & Opinion Economics,“The worry is: whatever the statistics are for February, they are going to be much worse next month.”
There is no telling what will happen to the U.S. manufacturers that depend on China for component parts in the coming months. There are no signals as to when Chinese factories will reopen and relieve the American firms that rely on them.
The effects are hitting some manufacturers harder than others. A transportation executive surveyed for the ISM report said, “Layoffs are here.”