Last week we explained why one of the areas of the economy likely to rebound the fastest once the COVID-19 crisis is over is residential real estate. At the other end of the spectrum is manufacturing, which could take much longer to fully recover. Two reports released this morning can help shed light on the damage already done by the coronavirus in this sector. First, the Institute for Supply Management’s (ISM’s) manufacturing index plunged to 41.5 in April, the worst reading since 2009 but better than expected. The employment component declined to the lowest level in more than half a century, and production had its worst print on record. Similarly, the manufacturing purchasing managers index (PMI) from IHS Markit fell to 36.1 in April, the lowest reading in 11 years. The report’s authors added that “business spending on inputs and equipment tumbled as companies slash production and investment,” and stressed that “smaller firms are being hit the hardest and reporting the highest job losses.” The weakness in the ISM and Markit reports is confirmed by regional data from the Federal Reserve released in April.
A big reason why the manufacturing sector could take longer than other areas of the economy to rebound is that many U.S. goods-producers sell their products both domestically and overseas, meaning that even if the COVID-19 disruptions in America suddenly vanished, overall customer demand may still not be back to normal if the pandemic is not under control globally. Further, many American manufacturers are highly dependent on foreign companies for key production components, so supply chains could also remain in disarray as long as trade partners are still struggling with their own containment of the virus. Although conditions will eventually normalize, the COVID-19 outbreak has highlighted just how reliant America is on foreign suppliers. This was of course the goal of the multi-decade globalization push, which has resulted in falling prices and other efficiencies, but such benefits may not be worth it if the cost is having key medical supplies and other critical products potentially not being readily available when needed the most. Due to the coronavirus “wake-up call,” though, political support has grown for bringing supply chains back from China, and a similar sentiment has even started to show up in Japan and the European Union, among other nations. If this global onshoring push can actually gain momentum it would result in inflation, at least during the initial transition phase until domestic production is ramped up, but such costs are arguably more than offset by the resulting long-term benefits. In the near-term these issues could cause another uptick in U.S.-China trade tensions, and at the very least be center stage in political debates for years to come.
Sources: Econoday, IHS Markit, ISM, FRBSL