US Markit Purchasing Managers’ Index April Preview: Looking into the abyss

The damage to the US labor market from the extensive, though not universal, commercial and social closures from the Coronavirus has been documented in the 22 million claimants for unemployment insurance in the last four weeks.  Another four million are expected to join the rolls this week meaning that a devastating 15.9% of the 164.6 million American labor force has been fired since the middle of March.

Unfortunately the accounting for the economy is just beginning. The outlook in the business community had already deteriorated to recession levels in March even though most of the shutdowns did not begin until in the third week of the month. Attitudes among business executives are expected to fall much further in the months ahead.

Markit’s purchasing managers indexes (PMI) are predicted to drop to 37 for manufacturing and 32.5 for services in April.  

Markit manufacturing PMI

That collapse in sentiment was evident in the Markit indexes for March.  The manufacturing PMI dropped to 48.5 from 50.7 in February and the services PMI plunged to 39.8 from 49.4.  

Markit’s relatively new series has not yet become a market touchstone for business sentiment and its primary interest is as a precursor for the widely followed indexes from the Institute for Supply Management (ISM).   Indexes from both organizations have similar compositions with scores above 50 marking expansion and below contraction in the industry or sector.

The ISM manufacturing PMI for April will be issued on May 1 and the services index on May 5.

Purchasing managers’ indexes in the markets

Sentiment in the business community has long been used as a forward gauge for the US economy.  Supply executives are positioned at the juncture of sales and planning.  They use the incoming revenue and orders data to advise on future production, expenditures and hiring.  Their decisions and outlook both reflect the state of the economy and help to determine its future.  

Every fall below 50 in the indexes has not predicted a recession but every post-war recession has been accompanied by a period of contraction in one or both of these indexes.

Markit and ISM histories

The purchasing managers’ indexes from IHS Markit of the UK do not have the long history of those from the Institute for Supply Management whose manufacturing index began in January 1948 and services version commenced in July 1998

Markit’s manufacturing data starts in April 2012 and the services statistics go back to November 2013. In that time the March reading in manufacturing was the first below 50 and the February score for services was its first. The March scores for both were also the lowest in the series.

The lack of a financial crisis reference for the Markit data is notable because for most economic statistics the 2008-2009 recession is deepest dive since the double recession of the early 1980s.

For instance, in the second half of 2008 the ISM manufacturing PMI plunged from 50.8 in July to 34.5 in December. It was the lowest reading in 28 years, since 29.4 in May 1980 which remains the record low for the series.

In the 72 year history of the ISM manufacturing index there have been 21 monthly scores at or worse than the 37 April forecast for Markit’s manufacturing PM.  The longest spell was seven months in 1948 and 1949 followed by four months in 1974, three in 1980, two each in 1953, 1957-1958 and 1980 and one in 1952.  The average time from the lowest score to a return to expansion was 5.4 months.

Business cycle vs ordered shutdown

The relatively prompt return of the American business sentiment to expansion in all of the recessions listed above, even the deep 1981-1982 and 2008-2009 downturns is indicative of the resilience of the US economy. When the economic corner had been turned executives began planning and executing for the recovery.  Business spending is one of the early drivers of most recoveries as consumer spending normally takes a while to regain confidence.  

There are two profound difference in the current situation and since neither has occurred before there can be no certainty how businesses will respond. 

American state, local and federal governments have never ordered widespread closures of commercial activity.  The harm and perhaps extinction that has been inflicted on many businesses makes it very difficult to know how many will survive and will be able to resume when the shutdown orders are lifted.

Second, the speed and extent of the job losses over the last five weeks may have inflicted such a shock on consumption that even if and when many workers are rehired the volume of business may take months or even years to return.

The answers to both of these questions will not surface until the government closure orders are lifted.  For now statistics have not yet plumbed the depths of the economic trough that lies ahead.

Conclusion and the dollar

Economic statistics are looking over the edge of the abyss.

It is possible that as the shutdown orders are lifted economic life resumes at a relatively rapid pace, workers are rehired, consumers take to the stores in large numbers  and by year end much that was lost will have been regained.  

It is also possible that the damage has been so severe that many of the jobs are gone and that consumers are so shell-shocked  that it will be years before they reacquire normal habits. 

This economic situation is unique and a plausible argument can be constructed for either scenario.

Two things however, are certain.  First is that April’s statistics will not be the bottom of the abyss.  Second is that until that bottom is in sight, the dollar’s safe-haven lure will not dissipate.