ISM semiannual report shows effects of COVID-19 on manufacturing and non-manufacturing sectors

While its predecessor report issued a positive 2020 growth outlook for the manufacturing and non-manufacturing sectors, the new edition of the Institute for Supply Management's (ISM) Semiannual Economic Forecast, which was issued in May, tells a much different story, due to the ongoing COVID-19 pandemic.

Data for this report is based on feedback from U.S.-based purchasing and supply chain executives in manufacturing and non-manufacturing sectors.

For manufacturing, ISM is estimating a 10.3% annual increase in 2020 revenue, down significantly from the 4.8% projection made in the report's December edition. And 58% of the report's respondents expect 2020 revenues to decrease, on average 21.2%, with the remaining 24% indicating no change, and only two of the 17 manufacturing industries ISM tracks—apparel, leather & allied products, and food, beverage, and tobacco products—expecting 2020 revenue growth.

Manufacturing capital expenses (capex) are expected to fall 19.1% in 2020, down from the previous expectation of a 2.1% decline. And 10% of the report's manufacturing respondents expect increased capex, with an average increase of 26.5% and 56% noting that their capex will be down by an average of 38.7%. ISM added that 34% indicated their capex spending will be flat annually, from 2019 to 2020.

Manufacturing capacity utilization, or operating rate, which came in at 75.9, is 7.3% below the 83.2 December reading, and production capacity is pegged to decline 3.6% in 2020, down from December's anticipated growth rate of 3.3%. Raw materials prices are expected to be off 2.8% for the year, below the previous estimate of a 1.1% increase. Employment is expected to be down 5.3% in 2020.

“While manufacturing revenue is expected to be down 10.3%, I think if you measured that number within the manufacturing committee for April and May, that number would be closer to 30%,” said Tim Fiore, chair of the ISM's Manufacturing Business Survey Committee. “For me, that indicates as we get further into 2020, we are going to see some level of recovery.”

Fiore said that there will be “better feel” for manufacturing in the coming months, which will be contingent on how things look if COVID-19 reoccurs in areas that had been seeing fewer cases and how they are addressed through strong contact tracing and the ability to test.

“There are some major problems here with the economic start up, and hopefully it is not going to lead to a steep slowdown again,” he said. “That remains to be seen. There are 50 state governors all kind of doing their own thing and are trying to balance the economic versus the personal issues, which is a tough job right now.”

On the non-manufacturing side, the report expects, 2020 revenue to see a 10.4% annual decrease, which is well below the December projection of a 3.4% annual increase, with all 18 non-manufacturing sectors expecting revenues to be down, which the report called “a dramatic reversal” from 2019, when all but one sector expected revenue gains.

Non-manufacturing production capacity, or the capacity to produce products or provide services in this sector, is expected to be down 2.8%, compared to December's anticipated 3.6% increase. Non-manufacturing capex is expected to drop 13.4%, compared to a previously expected 1.3% annual gain. And prices paid for non-manufacturing raw materials are expected to rise 3.9% for all of 2020, topping a 1.9% December projection.

Non-manufacturing capacity utilization, or the operating rate, is now at 73.3% compared to December's 86% reading, and non-manufacturing employment is expected to be down 3% in 2020, whereas the December report called for a 1.2% increase.

“As COVID-19 hit in full force, prior to that we did not feel the impact in March, because we had half a month of some decent numbers, which kind of offset the downturn experienced over the last two weeks of the month,” said Tony Nieves, chair of ISM's Non-Manufacturing Business Survey Committee. “April hit the sector with full force with contraction in multiple sectors, as evidenced by all 18 non-manufacturing sectors expecting revenue declines. That was expected with production capacity down, as this sector has always had a high operating rate. Overall, the sector is really feeling the effects of this pandemic.”

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