U.S. Manufacturing Sector Holds Up

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Economic Blog

Amid all of the attention on the coronavirus outbreak and related market volatility, and rightly so, we did get one of the most impactful U.S. economic data points on Monday—the Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) for manufacturing. Sounds wonky but this report has a fairly good track record of predicting near-term movements in the U.S. economy. That’s why we pay close attention to it. The very weak PMI reading out of China over the weekend heightened interest in this report.

The February reading is interesting because it encompasses some of the initial hit to business and consumer confidence from the coronavirus. Although the data point slightly missed expectations, as shown in the LPL Chart of the Day, it did remain (barely) above the 50 breakpoint between contraction and expansion. The 50.1 reading was only 0.8 below January’s level of 50.9, and even the new orders component, which is the most sensitive to business uncertainty because it measures future commitments, held up near the 50 level. For comparison, low 40s readings have historically been associated with recessions. Unsurprisingly, there was some evidence of supply chain disruptions in the report from lengthening supplier delivery times.

“The manufacturing ISM held up fairly well in February given the circumstances,” noted Ryan Detrick, LPL Financial’s Senior Market Strategist. “Although coronavirus containment measures will likely have more negative economic impact on March’s economic data, we are encouraged by the resilience of the U.S. manufacturing sector thus far during a period when the virus outbreak has spread to many countries around the world, including the United States, and disrupted global supply chains.”

Another reason to like the ISM report is its correlation to earnings. Should further weakness in the ISM Index be limited, we would expect resilient corporate profits. There is clearly downside risk to the bottom lines of S&P 500 companies, but based on the latest U.S. economic data and commentary from U.S. multinational companies, we think some earnings growth in 2020 is still attainable.

The ISM isn’t the only important economic data point due out this week. We will get the February jobs report on Friday. Check back here Friday afternoon for our thoughts on that report. Bloomberg-tracked consensus is 175,000 new jobs in February, down from 225,000 in January.

 

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