Incoming reports on business activity in America have sent mixed signals recently. For example, IHS Markit’s headline manufacturing PMI in November rose for the 7th consecutive month and signaled the fastest pace of improvement in operating conditions since 2014. The Institute for Supply Management’s (ISM’s) manufacturing index, though, declined in November, as did every regional activity gauge released by the various Federal Reserve Banks across the country. Employment was a key detractor last month, likely due to a combination of a shrinking supply of qualified applicants and some business managers putting hiring plans on hold in the face of elevated election and economic uncertainty. This could dampen expectations for Friday’s release of the November job report from the Bureau of Labor Statistics. On the bright side such headline weakness so far seems like nothing more than a temporary setback, and any kind of moderation was unsurprising following the V-shaped rebound that commenced after the lockdowns started to be lifted.
The winter wave of the coronavirus likely weighed on activity as well in November. For example, the Federal Reserve Bank of Philadelphia started conducting a “COVID-19 Business Outlook Survey” ever since the pandemic began and the latest update to this series revealed that a 55 percent majority of managers reported that sales were down in November as a result of COVID-19. Such sentiment was seen across both the goods-producing and service-providing arenas, although a larger share in the latter did report experiencing a recent decrease in sales. This makes sense since the non-manufacturing sector remains much more sensitive to lockdowns, activity restrictions, and general consumer foot traffic. As a result the service-sector versions of the ISM and IHS Markit indexes mentioned above could reflect a similar softening when the November updates are released tomorrow. However, with multiple effective vaccines apparently on the horizon, optimism could start to improve and we will therefore be looking for signs of an acceleration in business investment in the months ahead. In fact, the manufacturing update from Markit noted that “Although demand for consumer goods remained somewhat subdued, mainly reflecting rising virus infection rates, demand for investment goods such as business equipment and machinery rose especially sharply.” For some additional perspective, highlighted comment examples from managers in the November ISM survey can be found below:
- "We will finish out the fourth quarter very strong. Customers have increased demand and 2021 is expected to continue to grow." (Fabricated Metal Products)
- "Suppliers are still experiencing labor shortages resulting in component constraints. However, we're seeing life from customers, so there's a positive outlook moving into the first quarter of 2021." (Computer & Electronic Products)
- "We are getting a lot more COVID-19 hits in our factories. We are also sending employees home for 14 days to quarantine if they were in close proximity to individuals that tested positive. We have had to shut down production lines due to lack of staffing. Cost of goods sold [COGS] is much higher than normal due to labor and production inefficiencies." (Food, Beverage & Tobacco Products)
- "The resurgence in COVID-19 cases is adding strain on our Tier-1 and Tier-2 suppliers. Multiple suppliers mentioned that finding new people is an issue with the COVID-19 situation. And there is a learning curve for new [supplier] hires, impacting production efficiency at their place." (Transportation Equipment)
- “Starting to see some inflationary pressure on materials." (Furniture & Related Products)
Sources: Econoday, IHS Markit, ISM, BAML, FRBSL