As the coronavirus ebbed its way into the U.S. last month, the manufacturing sector experienced 11-year lows in both employment and new orders indexes.
In its monthly report published Wednesday, the Institute for Supply Chain Management revealed a one percentage point decrease in March’s PMI index that fell to 49.1%. A value below 50 indicates contraction in the manufacturing sector, which accounts for 11% of the U.S. economy.
Although a 1 percentage point decline appears small, the reports components show the manufacturing sector plunging as the full economic impact of the coronavirus sweeps the nation. The report also shows that a few industries have largely benefited from a rush of consumers buying supplies to prepare for expected quarantines.
“If payroll protection doesn’t come through, that will be the end of my business,” said Harry Slutter, owner of Urban Specialty Woods. “I can last 60 days with no revenue and then that is it.”
Urban Specialty Woods manufactures high end furniture on Long Island and is closed to be compliant with social distancing regulations. All orders stopped mid-march and it’s biggest supplier in Olean, New York, stopped shipping out of safety concerns. Slutter predicts his business will have even worse supply chain issues if his business makes it through the pandemic.
As coronavirus forced thousands out of work last month, the manufacturing sector was not immune.The Employment Index experienced a decrease of 3.1 percentage points from February and registered at 43.8%. The New Orders Index also decreased by 7.6 percentage points to 42.2%. Both are the lowest recorded values since the 2007-2009 recession.
“Certain factories will have to stay open; they are essential,” said Peter Morici, former Chief Economist at the University of Maryland. “That will keep ISM going for a bit.”
The businesses that have been deemed essential by the government have received marginal spikes in demand. Of the big six industries surveyed for the report, three expanded—with Food, Beverage & Tobacco Products leading the trend. In the report, a food and beverage executive reported record-high orders as a result of COVID-19.
The overall PMI Index was largely skewed by the Supplier Deliveries Index that reacted uniquely to effects from the pandemic. Supplier Deliveries is the only index that is inversed—a reading above 50% indicates slower deliveries—and usually implies customer demand is increasing, and the economy is improving. However, delivery times increased in March because the coronavirus disrupted supply chains globally.
Of the five equally weighted sub-indexes used to compose the PMI Index, Supplier Deliveries rose the highest by gaining 7.7 percentage points from February’s reading of 57.3%.
“Most businesses will have to see a worse April than March,” said Michael Englund, chief economist at Action Economics. “Even though ISM held near 50% in March, things really do have to go lower soon. I’m assuming around 39%.”
The manufacturing economy accounts for roughly 11% of the U.S. economy, and every full point of the PMI Index below 50% can reflect in a loss of 0.3 percentage points of real GDP. If the index falls below 41.1%, it will be an obvious sign that the economy is in a recession.
“I don’t think we will reach 2009 lows though, which were about 34.5%,” said Englund.
Although the National Bureau of Economic Research defines a recession as slowed economic activity over a few months, Englund and many economists believe the economy is already in recession.