Manufacturing supply chains, jobs reports show obvious downturn amid COVID-19 crisis

No surprise, March's manufacturing supply chain and unemployment reports show a significant downturn in face of COVID-19 crisis. And April's numbers are only expected to continue the decline. Getty Images

Remember when Utah Jazz center Rudy Gobert was diagnosed with COVID-19 after mocking coronavirus by touching the microphone during a press conference? Seems like ages ago. It was March 11.

That moment, less than a month ago, signified, unfortunately, the tipping point for COVID-19’s spread in the U.S. Shortly after the NBA postponed its season indefinitely, international flights into the country were restricted, and Tom Hanks tested positive in Australia.

Even if March was essentially a third of the way over by then, its entirety will forever be remembered as the month (most of) the U.S. began to take COVID-19 seriously. A panic to buy toilet paper led to social distancing to shelter-in-place orders to possible enforced rules about wearing face masks in public.

It’s to the point now where the spread of coronavirus is outpacing our ability to properly grasp the growing pandemic throughout the country. From an economic perspective, and it goes without saying, March was rough. “Distressing” and “unbelievable” might be more suitable terms, but still understatements nonetheless.

Manufacturing supply chains and employment numbers

Data from March’s Bureau of Labor Statistics (BLS) and one key manufacturing supply chain indicator, the Institute for Supply Management (ISM), reflects those very sentiments.

In the wake of the COVID-19 pandemic sweeping across the U.S. for much of last month, the end-of-the-month BLS jobs report and ISM Purchasing Managers’ Index (PMI) released last week each dropped a full percentage point from February. The jobs report shows that employers cut 701,000 jobs last month, while ISM reported a contracted PMI of 49.1%. On top of that, U.S. unemployment rose almost another full percent from last week to 4.4.%, bringing the total number of jobless claims to nearly 10 million in two weeks.

According to the BLS, it was the largest one-month decline since March 2009, the heart of the last financial recession. And of the more than 700,000 workers let go in March, 18,000 of those came from the manufacturing industry. That also includes 7,000 people working in the durable goods sector and 2,200 in the automotive and motor vehicle parts sectors. Those numbers are only expected to inflate in April’s jobs report.

On the supply chain side of things, despite the first contraction of the year, the ISM’s 49.1 PMI reading actually might come as a slightly pleasant surprise considering the pandemic wreaking havoc on manufacturing economies and the fact we saw an average PMI of 48.28 to close out the last five months of 2019. But March’s overall data isn’t telling the whole story, says Keith Prather, economist and managing director at Armada Corporate Intelligence.

“Most of us expected it to be far worse,” Prather said in Armada’s most recent Black Owl Report. “April could see a dramatic dip in activity as we get a full month of shutdown in the mix, but we'll likely know the full extent of the impact at the end of this month.”

And at closer look, some of March’s itemized data segments suggest a negative trajectory, says ISM Manufacturing Business Survey Committee Chair Timothy Fiore.

“Comments from the panel were negative regarding the near-term outlook, with sentiment clearly impacted by the pandemic and energy market volatility,” he stated in the March report. “The coronavirus pandemic and shocks in global energy markets have impacted all manufacturing sectors. Prices continued to contract, and at a faster rate in March, supporting a negative outlook.”

All of the following subindices significantly decreased from February:

• The New Orders Index registered 42.2%, down 7.6%.
• The Production Index registered 47.7%, down 2.6%.
• The Backlog of Orders Index registered 45.9%, down 4.4%.
• The Employment Index registered 43.8%, down 3.1%.

The fabricated metal products sector was one of six industries that reported contraction last month.

“COVID-19’s spread in the U.S. may start impacting our domestic business,” said an anonymous representative from the fabricated metal products segment noted in the ISM report. “As for Asian suppliers, they are starting to get back up to speed.”

Another key manufacturing supply chain indicator, IHS Markit, posted a contracted March PMI of 48.5 after an estimate of 49.2 heading into March and a 50.7 reading in February. Driving the decline were sharp downturns in output and new orders. Chris Williamson, chief business economist at IHS Markit, commented in the report that a growing number of company closures and lockdowns means business levels have collapsed.

“The final PMI data for March are even worse than the initial flash estimate, with manufacturing output slumping to the greatest extent since the height of the global financial crisis in 2009,” Williamson commented. “While some producers reported being busier as a result of stockpiling and antivirus activities, notably in the food and health care sectors, these are very much the minority, and most sectors reported a rapid deterioration in demand and production.”

He added that orders for capital equipment have deteriorated at a rate not seen since data was first available in 2009 when firms stopped investing in machinery.

Prather also said the fact that ISM and Markit are offering consistent data is noteworthy: “For the first time in a long while, the Markit and ISM reports are telling a similar story.”

Manufacturers felt coronavirus effects before March

Based on what we’re seeing now with rising jobless and death rates (nearly 7,000 dead as of this past weekend), it’s hard to argue against the notion that more drastic action needed to take place on the federal level long before early March. But before hospitals and unemployment offices around the country felt the true effect of COVID-19, U.S. manufacturers were already seeing the first dominos fall well ahead of March.

ISM conducted an independent survey between Feb. 22 and March 5, polling more than 325 manufacturers (and 303 nonmanufacturers) on how the initial spread of COVID-19 from China was altering their supply chains. Close to 75% of those manufacturing companies said that they experienced supply chain disruptions and transportation restrictions due to coronavirus. And 80% anticipated some sort of impact related to the spreading pandemic.

“The story the data tells is that companies are faced with a lengthy recovery to normal operations in the wake of the virus outbreak,” said Thomas W. Derry, CEO of ISM. “For a majority of U.S. businesses, lead times have doubled, and that shortage is compounded by the shortage of air and ocean freight options to move product to the United States — even if they can get orders filled.”

At the time of the survey, 16% of the total respondents reported decreasing revenue targets by 5.6% due to COVID-19. And more than 44% of respondents said they did not have a plan in place to address supply disruption from China.

Additionally, a couple of weeks ago, the March Thomas Industrial Survey of 1,400 U.S. manufacturers found that more than half of the respondents (55%) expect a revenue reduction in 2020. It was a 19% increase compared to February’s 34%. The number of manufacturers that said they are now looking to source domestically jumped to nearly 50%.

When asked what materials are needed to stabilize supply and keep production on schedule, manufacturers reported:

• Fabricated materials (machined, stamped, extruded, or molded material) at 41%.
• Metals (steel, aluminum) at 30%.
• Electrical or electronic components at 30%.
• Raw materials (paper, wood, textiles) at 26%.
• Machining tools and parts (fasteners, bearings, cutting bits, abrasives) at 21%.

These surveys were taken before anyone in the industry truly knew how much COVID-19 would impair business once it began to take full effect in the U.S. Now, the number of domestic manufacturers and fabricators impacted by the virus is likely 100%. Whether a facility or shop is temporarily shut down after being deemed “nonessential” or has seen a complete shift in production priority as it helps make personal protection equipment (PPE) or build hospital beds and COVID-19 testing facilities, every corner of manufacturing and fabrication across the country will feel it in one way or another.

The economic impact on the manufacturing and fabrication industries we saw in March is only the tip of the proverbial iceberg. In the meantime, buckle up and brace for the April data.