Manufacturers' Look Sluggish After Bearish PMIs and ADP Employment Report

Economic Report Monitor #36

June 3rd, 2020

After a quiet Tuesday, the middle of the week brings more COVID-19 economic data. The gamut of reports includes the non-manufacturing PMIs from IHS Markit and the Institute of Supply Management (ISM). Crucial data also was released for factories and energy with new orders and the weekly crude oil supply data. Finally, the Automatic Data Processing employment report brings a preview of the official Bureau of Labor jobs report on Friday.

On Monday, the manufacturing PMIs revealed a troubled industry that was just starting to see some relief but with respondents suggesting a rebound is likely to be sluggish. The non-manufacturing and service PMIs today mirrored that sentiment today. The IHS Markit Services index jumped to 37.5 in May after dropping to the record low of 26.7 in April. Firms continued to see muted demand with the shutdown lasting through the month. Foreign demand was especially slow as new business from abroad decreased at a "historically substantial pace." The continued contraction in business led to an increase in uncertainty, especially regarding the length of the slowdown, which in turn has kept employment from rebounding significantly. The upcoming June report, when most of the reopening will occur, will be the most telling of how the service economy will recover as the COVID-19 outbreak winds down.

The ISM non-manufacturing PMI saw a rebound as well in May despite the composite index only increasing 3.6 pts to 45.4. The biggest jump was in business activity and production which launched upward 15.0 pts to 41.0, likely seeing a big jump because of its harsh drop in April. New orders also saw a healthy jump up 9.0 pts to 41.9. The disappointment was in the employment index which barely budged from its low level, up just 1.8 pts. As mentioned before in the IHS report, the sour outlook for the recovery probably led to the failure of a significant rebound. Again, it'll be important for that to reverse in June when states begin to seriously open up.

Factory orders provided another view into business activity but with a bit of a lag unlike the PMIs. The April release sees another double-digit drop of -13.0% to add on to the pain of a -11.0% drop in March. Non-durable industries see most of the pain as new orders to those firms drop -17.7% with primary metals like aluminum, iron, and steel seeing a drop of -14.7%. Lack of demand in these industries reflects the drop in prices reported by the ISM in their manufacturing PMI. Machinery also saw a sizeable loss, down -7.2%, with construction focused segments deepest in the red. The non-durable good industry continued to see less of an impact than its counterpart with it only being down -4.5% YoY vs a -11.6% YoY drop in durable good industries. The trend is visible in inventories as well where durable inventories are up 3.1% YoY and non-durable inventories are down -6.4%.

Moving to energy, the weekly crude supply estimates came in mixed. Crude stockpiles increased by 1.9 million barrels last week with commercial stockpiles actually falling -2.1 million barrels as the SPR absorbed 4.0 million barrels. With this addition, the SPR now passes where it was a year ago at 647.8 million total barrels. The movements here have shown that the Trump administration is committed to fighting the supply situation while oil prices begin to stabilize. In another bullish move, domestic production fell -200 b/d last week, now down -1.2 million b/d from the year before. However, both bullish data points above were countered by a drop in consumption. Refinery input, while seeing a slight increase this last week, is still down -3.6 million lower than a year before at 13.3 million b/d. In addition to that, product supplied stalled again, down -892k b/d this last week and -4.3 million b/d from last year.

Finally, employment gets an update as the ADP National Employment Report reveals a -2.76 million drop in payrolls in May. The number, while large, is dwarfed by the -19.6 million drop in payrolls in the previous month. It also surprised economists which expected a drop as big as -8.75 million and led some of the experts to suggest employment losses may have peaked in April. Many aspects of the May report mirrored the previous report, however, as large- and mid-size businesses accounted for 84% of the job losses. The service sector took most of the blow again with 71% of the losses. However, one difference is that manufacturing accounted for a larger percentage of job losses (26.1%) compared to April (8.3%). This was likely because manufacturing firms weren't necessarily forced to close, so their initial job losses were limited, but those companies are now faced with under-utilization and weak demand which brings the threat of doors permanently closing.