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April Manufacturing Shows Soft Demand & Trade Slowdowns

The nation’s leading factory index in April dropped to its lowest level in two years as trade concerns and softening demand increased headwinds on U.S. manufacturers. Whether it’s a one-month event or the beginning of a trend remains unclear.

The Institute for Supply Management’s leading index, the PMI, dropped by 2.5 percent in April to 52.8 from 55.3 in March. Supporting indices — new orders, production and employment – all declined as manufacturers reported demand was weakening.

The industry continues to grow—any number above 50 indicates expansion—but both trade indices fell into contraction territory for the first time in two years. Manufacturing executives cited the U.S./Mexico border, tariffs and Brexit as potential long-term concerns.

New orders in April fell 5.7 percent to 51.7; production decreased by 3.5 percent to 52.3; and employment decreased by 5.1 percent to 52.4. Export orders contracted for the first time since February 2016.

One manufacturing expert said April’s data is not particularly worrisome.  “I would say what we see from the PMI and the ISM on a month-to-month basis is not cause for alarm,” said Steven Rosen, co-CEO of Cleveland-based private equity firm Resilience Capital Partners. “It’s not the beginning of a trend.”

Consumption, as measured by production and employment, continued to expand in April, according to Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee, but at lower levels. That resulted in a combined decrease of 8.6 points in the overall index.

“Inputs — expressed as supplier deliveries, inventories and imports — were higher this month, primarily due to inventory growth exceeding consumption, resulting in a combined 1.5-percentage point improvement in the supplier deliveries and inventories indexes,” Fiore said. “Overall, inputs reflect a more stable business environment, confirmed by the prices index at zero price growth, or unchanged.”

Production could have been better, Fiore said, had the employment picture improved. Rosen pointed to a lack of skilled labor as an ongoing problem. “We are in a very tight labor market,” he said. “That will have a greater impact on manufacturing than any monthly indices. If you want to add a third shift in your factory, you can’t find labor anywhere. That makes it impossible to increase your volume, and [manufacturers] aren’t getting any traction in pricing.”

Personnel was also a factor as shipments languished at the U.S. southern border. “Mexico/U.S. border crossing delays are slowing supplier deliveries,” a tech executive told the ISM. Even though the border was not closed, employees were shifted from the Customs department to Immigration to manage the flow of people into the U.S., Fiore said. “That only exacerbated delays. Businesses continue to worry that the border still might be closed. The [U.S./Mexico] supply chains are so entangled that closure remains a concern.”

Global or local?

Tariffs are resulting in increased prices on computer components, the tech executive said, “as well as manufacturers moving out of China to countries not impacted by the tariffs. Brexit [is] expected to result in delays on moving product through the United Kingdom.”

Fiore said the global economy is impacting demand for U.S. goods. “I think what we are seeing is tied to sluggishness around the world,” he said. “The China PMI came in under expectations and the EU is not as strong as it should be. Germany, Europe’s strongest economy, is essentially in recession.”

On the domestic front, Rosen said that Boeing’s problems with its 737 Max has a deep impact on the supply chain. “The effect isn’t isolated to Boeing—there are many suppliers and subcontractors that feel it as well,” he said.

Manufacturers may also be reaching ‘tariff fatigue.’ “I think by now the industry was hopeful the tariff issues would be resolved,” Fiore said. “Our two key trade indices are in contraction mode, and I think [U.S. manufacturers] built up inventory to avoid a tariff increase. But the production numbers, that were frequently over 60 last year, only reached that point once in 2019.”

What this portends for the rest of the year depends on one's point of view. The global market isn't improving, Fiore said, and the PMI has been inching downward since November of 2018. The trade indices' dip into contraction territory appears troubling.

Rosen said the biggest challenges are domestic. “I think we are seeing circumstances that are driven by politics that are impacting the economy.” Tariff and border issues will be resolved, he said, and he doesn't see signs of a recession. “The growth is going to be there today and the next quarter and the quarter after that. Our biggest problem is political,” he said, pointing to anti-capitalist rhetoric associated with the 2020 election.

The ISM also reported:

  • Supplier deliveries registered 54.6 percent, a 0.4-percentage point increase from the March reading of 54.2 percent
  • The inventories index registered 52.9 percent, an increase of 1.1 percentage points from the March reading of 51.8 percent
  • The prices index registered 50 percent, a 4.3-percentage point decrease from the March reading of 54.3 percent

New orders softened to the low 50s; the customers’ inventories index remained at a ‘too low’ status; and the backlog of orders improved over its prior month performance, according to Fiore.

“The manufacturing sector is expanding, but at recent historic lows,” he concluded.

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