For U.S. Manufacturers, an unprecedented Hit

A close reading of survey data suggests U.S. manufacturers are seeing their toughest times since at least the end of World War II

By guest author Justin Lahart from Wall Street Journal

Graphic and caption courtesy by Wall Street Journal

The Institute for Supply Management on Friday, May 1, 2020, said that its manufacturing index fell to 41.5 last month from 49.1 in March, marking its lowest level since April 2009, when factories were getting hammered by financial crisis aftershocks. Anything under 50 indicates a contraction in manufacturing activity.

But as with the March report, the ISM noted that the overall index for April was again distorted by a slowdown in supplier delivery times. Usually when deliveries slow it is a sign that suppliers are struggling to meet rising demand and business is picking up, but now it is because the new coronavirus crisis has disrupted supply chains around the world. Another component of the index, inventory levels, also softened the drop. Usually when manufacturing is hurting inventory levels swell as orders collapse, but in this case supply chain disruptions are keeping that from happening.

The remaining components of the index—new orders, employment and production—were all atrocious. The ISM’s new orders gauge hit its lowest level since December 2008, the employment gauge hit its lowest level since June 1949 and the production gauge hit its lowest level on record going back to January 1948. An average of those three gauges—or the overall ISM index minus the delivery time and inventory components—was also at its lowest level on record.

Conditions for many U.S. manufacturers may get worse before they get better. Because they are much more globally integrated than most businesses they must contend with the effects of the coronavirus on demand around the world. So even if shutdowns and other restrictions are eased in portions of the U.S., allowing more factories to come back online, much of the international demand those factories supply may not be there. Even domestically, manufacturing won’t necessarily snap back as soon as restrictions are lifted: A lot of domestic demand will remain stunted until the U.S. job market begins to recover and people become less wary about spending. That will take time.