Supply chain reports look at the state of manufacturing during COVID-19 crisis

The COVID-19 crisis severely hampered manufacturing supply chains during April and May, according to data from ISM and Markit. Getty Images

To get an idea of how manufacturing managed during the peak of the COVID-19 crisis in April and May, just take look down the industry’s supply chains.

Two key supply chain indicators, Institute for Supply Management (ISM) and IHS Markit, paint a picture of the coronavirus’s impact on manufacturing over the previous two months. The ISM Purchasing Managers’ Index (PMI) averaged out to 42.3% in April (41.5%) and May (43.1%), well below the previous 10-month average of 49.5%. As a reminder, anything 50% or higher indicates an expanding industry. Markit’s PMI, though slightly gloomier, took a similar path with a 37.9% average (36.1% in April and an increase to 37.9% in May).

April’s industry “virus show”

While there was a slight rebound in May, ISM Manufacturing Business Survey Committee Chair Timothy Fiore summed up April as the “virus show,” with the 41.5% PMI hitting its lowest level since April 2009 during the financial crisis. The overall economy also contracted for the first time in 131 months.

“Ninety-plus% of our respondents addressed the virus situation. It was the virus show in April. There’s no doubt about it,” Fiore said during an early May appearance on Manufacturing Talk Radio. “Nobody was worried about anything else but making sure their employees were safe, that they could still acquire materials, and, most importantly, that their company could meet some amount of revenue output in spite of everything.”

The April rate-of-change numbers on several of the PMI subindices set modern month-over-month records. The new orders rate of change contracted 15.1% (42.2% to 27.1%) from March, the fastest it’s declined since 1951. On the production side, the rate of change contracted 20.2% (47.7% to 27.5%), a rate not seen since 1984. The employment rate of change contracted 16.3% (43.8% to 27.5%), the most since 1948, The supplier delivery rate of change slowed to a point not seen since 1976.

Even though ripples of the coronavirus could be felt in March, the month of April was a truly complete measure of how it affected manufacturing. March's ISM Report on Business registered a 49.1% PMI.

“The rate of change was so dramatic at the end of March, it was really hard to capture the month of March in that PMI number,” Fiore said.

May’s manufacturing transition period

May, much like March, was viewed as another transition month. For the time being, the PMIs appear to be creeping up toward the positive, despite some mixed figures.

Two common themes emerge throughout ISM’s and Markit’s May reports, according to Keith Prather, economist and managing director at Armada Corporate Intelligence: “Demand on the front end is weak, and yet supply chain bottlenecks and component parts shortages are limiting output.”

Along with the ISM PMI ticking up more than a percentage and a half, the overall economy returned to expansion. While still almost 7% away from getting back to industrywide expansion, scattered throughout the subindices were some noteworthy contraction slowdowns compared to last month.

Inventories was the only subindex to get back into expansion territory at 50.4%, and supplier deliveries (68%) continued its expansion despite an 8% dropoff. New orders (3.8%), production (33.2%), employment (32.1%), prices (40.9%), backlog of orders (38.2%), and new export orders (39.5%) were all up. Customer inventories (46.2%) and imports (41.3%) dropped farther into contraction.

Fiore, during another Manufacturing Talk Radio appearance on June 1, suggested that one of the biggest concerns revolves around the continuing weakening of demand and new orders, especially from Europe and China.

“New export orders are concerning,” he said. “Europe is very weak and is going to continue to be. If you look at their Q1 numbers, they’re really bad compared to the United States. They’re not as adept at stimulating their economy, which will keep a limit on our new export orders. And the issues going on now in China are much more comprehensive than just tariffs and will probably have some impact on export orders too.”

Markit’s May PMI also showed some of its contracted indices softening. But, overall, its latest PMI was the second-steepest deterioration in manufacturing operating conditions in 11 years.

“With increasing numbers of companies restarting production, we should see some improvements in the output trend in coming months, and it was reassuring to see signs of the downturn already starting to ease in May, suggesting April was the eye of the storm as far as the production collapse is concerned,” Chris Williamson, chief business economist at IHS Markit, commented in the report.

Production recovery, supply chain, and inventory concerns

Because of COVID-19’s impact on supply chains, more and more manufacturers are forced to apply additional lean manufacturing practices. In ordinary circumstances, the low reading of ISM’s Customers’ Inventory Index in May (46.2%) would usually be a welcomed number. But Fiore sees it pointing to a bigger problem.

“The customer inventory number got back into the ‘too low’ territory, which I normally like, but I think it’s primarily there because of liquidity management issues at the customer level,” he said. “People don’t want to take additional inventory right now because they’re not sure if they can convert it. And that will be an even more acute problem because June is a quarter close month.”

Regarding production recovery and consumption, there are going to be shop floor limitations. With many manufacturing companies implementing precautionary COVID-19 safety measures, social distancing is going to continue to hamper those “essential” manufacturers that worked through the previous two months and will slow down the catch-up process for those shops restarting operations.

“They’re all restarting at 25%-35% levels, and they’re all probably optimistic they’ll be able to get to something approaching 80%,” Fiore said. “But I think we’re going to be limited by shop floor space, causing people to go to three-shift operations. You can only put out so much per square foot per head given a 6-ft. distancing requirement in these facilities. Are companies going to be able to get back to 100% by Q4? I think not.”

But the most prevalent problem facing efficient production restart? Squaring out the supply chains.

“Many countries are slightly behind the United States in reopening after the global pandemic,” Prather said in Armada’s most recent Black Owl Report. “Many districts in Mexico are still struggling to reopen in the face of COVID-19, and component parts flows from those regions are still delayed. Asian countries are struggling to get back to normalized freight flows, and India is still reeling from the virus.”

Fiore anticipates the supply chain constraints, at least on the U.S. end, will get sorted during the June time frame. But, in the meantime, it’s just a waiting game as manufacturers struggle with suppliers who restarted at the same time.

“When companies restarted, they all came back at once,” he said. “Normally, that’s not what you do. Usually you restart your supply base first to get the material flowing and then restart your own facility.”

An anonymous representative from the fabricated metal products sector noted that very issue in May’s ISM report: “We supply the construction industry in various ways, where the slowdown has been a bit slower than most industries. It is, however, beginning to impact our business, and we see more challenges on the horizon.”

A skewed industry picture

One of the biggest issues with monthly reports during a pandemic is that the industry gets caught up in such a fast-moving environment, and dramatic shifts (or “cliff events,” as Fiore calls them) in the markets at the end of the month don’t tell a comprehensive story.

“The surveys are collected throughout the month, but they are typically cut off earlier in the month,” Prather said. “Some of the reporting was likely completed prior to broader opening of the economy by mid-month. Therefore, it’s probably fair to assume that most of the regional Fed Reports and the national ISM and Markit reports were all somewhat weaker than real, street-level activity.”

Whereas mid-March saw manufacturing companies, many considered nonessential, temporarily closing shop, the end of May saw those same companies opening back up.

“A lot of our panel was returning to work the last couple weeks of the month,” Fiore said. “So, I’m not sure we captured all of that. I think June is going to be a really interesting month as we struggle to restart.”