Manufacturing activity rebounded in January with the Institute for Supply Management’s PMI showing expansion for the first month since July, but the coronavirus could cause a slump in manufacturing next month.
The index increased to 50.9 from 47.8 in December. Economists polled by IFR Markets expected the index to remain contractionary, rising only to 48.5.
“Global trade remains a cross-industry issue, but many respondents were positive for the first time in several months,” said Timothy Fiore, chair of the ISM’s Manufacturing Business Survey Committee.
Respondents seemed to be generally positive. One said, “business has picked up considerably” and many suppliers returned to working at or above capacity, despite continuing concerns about tariffs.
"This suggests that the worst of the trade dispute impacts on manufacturing may be behind," said Mark Hamrick, senior economic analyst and Washington bureau chief, at Bankrate.com. "Unfortunately, the great unknown right now is the impact on global trade and growth related to the coronavirus. It isn’t a question whether it will be negative, only how much and how long, particularly regarding China."
While the decreased trade tensions with China, including the signing of a phase one agreement mid-month, helped manufacturers, the coronavirus may take away those gains. The spread of the virus could result in “a significant economic in slowdown in China,” and poses an economic risk, noted KBW’s Fred Cannon.
“The solid improvement was led by the production, new export orders and new orders components, while only two of the indexes declined,” according to Bank of the West Chief Economist Scott Anderson. “The sizeable improvement in the ISM manufacturing index in January is likely due to easing global trade tensions after the U.S. and China agreed to a phase one trade deal last month.”
Manufacturing “will be especially interesting to follow over the next few months in light of the phase one trade deal,” said Emily Weis, macro strategist at State Street. “Notably, there isn’t much in the deal that will actively alter the economic outlook as tariffs are still in place but it could provide a boost to sentiment.”
Although the “manufacturing recession” has not leaked into the services and consumer sectors, she said, it would “be a rough signal if the phase one deal is signed and manufacturing sentiment continues to deteriorate. That could point to a broader issue beyond the trade war.”
“While the coronavirus development does imply some downside to near-term growth, it should not derail the global recovery,” according to Morgan Stanley Research’s Chetan Ahya. “From a global perspective, the impact to growth will come through China’s GDP and its contribution to global growth, as well as spillover effects on the rest of the world — principally via the trade and tourism sectors,” Ahya said in a note. “How long business activity in China and global trade and tourism flows are disrupted will determine the final impact on global growth.”
The impact on the economy should be limited to February and March data, assuming the virus is contained within two months, and with “fundamental growth drivers … still intact, we should get back onto the recovery path from 2Q20 onwards.”
“It is still too early to predict the peak of the virus, but we could learn a lot more over the next two weeks as containment measures appear firmly in place globally,” according to Edward Moya, senior market analyst, New York, OANDA. “It will take a couple more weeks before markets are confident that the virus was mostly contained to China.”
Construction spending
Construction spending fell 0.2% in December, the first time since June that it decreased. The Commerce Department revised the November figure to a 0.7% rise from the initially reported 0.6%.
Economists expected a 0.5% rise.
“The decline was due to a 1.2% decrease in nonresidential construction with residential construction advancing 1.4%,” Anderson said. “Despite the decline, total construction spending is still 5.0% higher than a year ago, led by a 5.8% rise in residential construction.”
"Unusually mild winter weather should have provided a boost to construction spending in December, but it did not," wrote Yelena Maleyev, associate economist at Grant Thornton in a note. "That means the weakness we saw in construction was probably even worse than it appeared, given how the data is seasonally adjusted."
While the drop was fueled by soft nonresidential spending, Bankrate's Hamrick said, "homebuilding was on the rise and we should expect support from the decline in mortgage interest rates to multi-year lows."
