Lazar Cartu Announces Manufacturing: Coronavirus Effect Is Rising - Jonathan Cartu Residential & Industrial Construction Services
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Lazar Cartu Announces Manufacturing: Coronavirus Effect Is Rising

Market Outlook

Lazar Cartu Announces Manufacturing: Coronavirus Effect Is Rising

Manufacturing in the U.S. was contracting for the latter half of 2019 and bounced back for two straight months in early 2020. But that was before the impact of coronavirus, oil price wars, and transportation restrictions hit the U.S. and world economy. Well, we are back to contraction again in the U.S. based on the ISM Manufacturing Purchasing Managers Index (PMI). The current PMI is below 50 at a value of 49.1 in March 2020. A value over 50 indicates expansion and a value under 50 indicates contraction. Furthermore, it will likely get worse before it gets better. One must realize that March had about two to three weeks before the full impact of COVID-19 hit the country. I discussed this in my article last month on manufacturing where I mentioned that the full impact of the coronavirus and also the Boeing (BA) 737 Max production shutdown has not yet been felt in the U.S. economy. In this case, my outlook was accurate. I would rather it was not for obvious reasons. It is clear at this point that most manufacturing industries with the possible exception of Food, Beverage & Tobacco Products will contract for at least the next couple months.

Source: Dividend Power

U.S. ISM Manufacturing PMI March 2019 – March 2020

US PMISource: Statista

Manufacturing Industries Are Slowing and The Next Few Months Looks Bad

The impact of COVID-19, oil price wars, and transportation restrictions are starting to propagate through the U.S. manufacturing sector and economy. In March, 9 out of 18 industries reported growth. This is down from February. Listed in order these are Wood Products; Printing & Related Support Activities; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Plastics & Rubber Products; Paper Products; Chemical Products; and Computer & Electronic Products.

This means that 9 out of 18 industries were contracting in March. Listed in order these are Petroleum & Coal Products; Transportation Equipment; Primary Metals; Textile Mills; Nonmetallic Mineral Products; Furniture & Related Products; Miscellaneous Manufacturing; Fabricated Metal Products; and Machinery. Energy, mining, and trucking continue to be in the doldrums. The recent collapse in oil prices suggests that energy’s contraction continue for some time in 2020. The slowdown in energy, mining, and softness in automotive demand seemingly has affected the metals and machinery industries.

As one can see from the chart below, all the sub-indices for the PMI are contracting with few exceptions. Supplier deliveries, inventories, and customer inventories exhibited a positive percentage change. But this is likely due to the stocking up effect of consumers staples and essentials. Of note, is that new orders, employment, backlogs, exports, and production are all trending in the wrong direction. Clearly, we are starting to see the full impact of COVID-19 and even the Boeing 737 Max shutdown.

ISM March 2020 PMI On Manufacturing

ISM 2020 March PMISource: ISM March 2020 Report on Manufacturing

But with that said, the full impact of the recent coronavirus pandemic has probably not been felt yet in the manufacturing sector. One has to only look at recent past headlines to realize that manufacturing activity in China stopped for essentially several weeks to two months. Only now has the Chinese economy restarted. If the U.S. economy experiences a similar trajectory then we can expect the PMI and sub-indices to decline further in April. However, there is the possibility that due to delayed response to COVID-19 in some states that the U.S economy’s trajectory could be worse than expected.

Commentary from the ISM report is even more negative than last month and suggests that the effects of coronavirus are causing a significant disruption to manufacturers. However, the commentary from the Food, Beverage & Tobacco industry was positive.

The two main issues affecting our business [are] COVID-19 and the oil-price war. We are in daily discussions and meeting constantly, updating tracking logs to document high risk concerns.” (Chemical Products) – We are experiencing a record number of orders due to COVID-19. (Food, Beverage & Tobacco Products) – COVID-19’s spread in the U.S. may start impacting our domestic business. As for Asian suppliers, they are starting to get back up to speed. (Fabricated Metal Products) – COVID-19 has caused a 30-percent reduction in productivity in our factory. (Machinery) – All North American manufacturing plants have ceased operations or drastically scaled back as a result of customer plant closings and other responses to COVID-19. (Plastics & Rubber Products) – A big part of our business is hospitality, and we are seeing demand drop and an increase in cancellations. (Nonmetallic Mineral Products) – COVID-19 is impacting China’s raw material supply chain. We are now seeing revenue impact in that region. Our operations team is reviewing plans for spread of the virus.” (Computer & Electronic Products)

Services Was Still Growing but The Next Few Months Will See Contraction

Services are still showing expansion. But with that said, there was substantial weakening in the sub-indices in March 2020. The current NMI value is now at 52.5 in March 2020. This still indicates expansion. In fact, it is the 122nd consecutive month of growth for the non-manufacturing sector and 128th month for growth in the U.S. economy. However, one can clearly see that almost all sub-indices except for Supplier Deliveries and Backlog of Orders showed a percentage decrease. Some are now contracting after many months of robust expansion. Of particular concern is that Business Activity, Employment, and Inventories are contracting rapidly. I expect that these will contract further in April. One only has to look at news headlines to see that companies in Accommodation & Food Services, Arts, Entertainment & Recreation, Educational Services, and Retail are essentially shutting down for most of April. For instance, Disney (DIS) is furloughing most works later in April. Many retailers including Macy’s (M) have closed stores. Even Starbucks (SBUX) has shuttered dining areas.

ISM March 2020 PMI on Non-Manufacturing

ISM 2020 March NMISource: ISM March 2020 Report on Non-Manufacturing

In March almost all non-manufacturing sectors reported growth. Currently, 9 out of 16 non-manufacturing sectors are reporting growth. In order, the 9 expanding industries are Health Care & Social Assistance; Real Estate, Rental & Leasing; Public Administration; Utilities; Finance & Insurance; Construction; Management of Companies & Support Services; Wholesale Trade; and Information.

This means that 7 out of 16 non-manufacturing sectors are reporting a decrease. In order, the 7 contracting industries are Arts, Entertainment & Recreation; Transportation & Warehousing; Professional, Scientific & Technical Services; Mining; Other Services; Retail Trade; and Educational Services.

Commentary from the ISM non-manufacturing report is much more negative this month after the effects of coronavirus started to creep into the commentary last month. Companies are reporting that the lack of PPE is impacting business, and many are resorting to telecommuting. On the plus side a few industries are reporting minimal impact.

Significant shortages of personal protective equipment (PPE), chemical reagents, test swabs and other basic medical supplies persist. Extreme sourcing measures are required to procure necessary supplies for basic operations. Distributor allocations continue across the board. (Health Care & Social Assistance) – Significant demand disruption caused by the coronavirus. (Accommodation & Food Services) – The coronavirus is having an impact, but not as much as we thought it would at this point. All sectors are staying busy. Although there are many customer concerns, we are finding work-arounds and adapting to the ever-changing situation. (Construction) – COVID-19 shelter-in-place order in effect. Offices closed except for essential personnel. (Educational Services) – COVID-19 has greatly impacted daily operations. All staff personnel are telecommuting, and customer concerns have shifted from normal activities to preventative measures. (Management of Companies & Support Services) – We are experiencing no real issues from a business perspective, although COVID-19 has forced us to reconsider elements of how our workforce gets things done. (Mining)

Final Thoughts the U.S. Economy and Stock Market

Clearly, the U.S. manufacturing sector, non-manufacturing sector, and U.S. economy have slowed. But I do not yet think that the full impact of COVID-19 and oil price wars have been felt in the U.S. economy. Many large companies, small companies, and small businesses in the non-manufacturing sector are in effect shutting operations for at least one month. The stock market has been pummeled with all three major U.S. stock indices entering bear market territory. The markets have bounced back some in the past two weeks, but the 11-year bull market has effectively ended. The S&P 500 earnings multiple has now dropped to about 18.8 as of this writing. This is still high but much less than in January 2020 when it was about 24 – 25. Notably, the Shiller price-to-earnings ratio is down to about 23.6. This is a significant drop from over 30X just a couple of month ago. Despite the decline in stock prices, U.S. stock markets are still somewhat overvalued in my opinion relative to future expected earnings. I think there is a widespread fear of missing out if the market bounces back quickly. There is still high volatility in the market as measured by the CBOE VIX. However, it is now down below 50 and trending downward. The Fear & Greed Index is still at extreme fear. Although it is not pegged near ‘0’ anymore, which is a positive sign. But with that said, in my opinion small investors should be wary and be selective and judicious in the stocks they buy. I for one, am focusing quality dividend growth stocks….

Jon Cartu