Markit Manufacturing PMI Falls
Markit manufacturing report from February showed business is starting to wane as the coronavirus catalyzes a slowdown in global growth. PMI fell from 51.9 to 50.7. Good news is this is only a tick lower than the flash reading. It's surprising that activity didn’t decelerate quicker in the 2nd half of the month.
But many still expect this reading to fall below 50 in March as the coronavirus peaks. Marginal expansion in output was the slowest since July 2019. Supply chain issues impacted production and constrained output.
New orders expanded at the slowest rate since June 2019. Shockingly, even though demand was weak manufacturers had higher confidence in the year ahead. Sentiment hit a 10 month high. Expanded marketing and investments in new products could come to bite these firms because demand is going to slow significantly in the next few months. Now is the time to preserve cash, not make new investments.
Pre-production inventories fell and backlogs rose because of supply chain issues. Input inflation fell and selling prices rose at a quicker rate. Chief Business Economist at Markit stated, "Manufacturing production and order book trends deteriorated markedly in February as producers struggled against the double headwinds of falling export sales and supply chain delays.” Factory production and orders are falling at a 3% annualized rate. Worse declines are likely coming.
Motor Vehicle Sales Were Fine
We’re seeing a mixed bag in the February data after the January data was so strong. A cyclical upturn was ended by the coronavirus. Weak February reports will only get worse in March and the strong reports will likely turnaround.
February motor vehicle sales report was fine. Sales fell from 16.9 million (revised up from 16.8 million) to 16.8 million. This hit estimates. Domestic sales fell from 13.2 million (revised up from 13.1 million) to 13.2 million.
Huge Wave Of Refinancing
Usually the MBA applications report focuses on the purchase index since housing starts have a significant impact on the economy. And usually refinancing activity isn’t material. Even very strong growth can be meaningless when it’s at a low base.
As you can see from the chart below, there were few refinancing applications in 2018 and 2019. Yearly and weekly growth were irrelevant. That’s not true now as you can see refinancing has spiked. Weekly growth was 26% after it fell 1%. Yearly growth was 226%. It’s safe to say consumers are taking advantage of lower rates.
Average 30 year fixed mortgage rate was 3.29% in the week of March 5th. That was a 16 basis point weekly decline which was the largest weekly decline since June 6th, 2019. This is the lowest average mortgage rate ever. It will likely fall below 3% in the next few weeks because long bond yields have crashed.
This pickup in refinancing caused the composite index to have 15.1% growth which was up from 1.5% growth. Purchase applications index was down 3% after increasing 6%. Its yearly growth was 10%. The run of double-digit purchase applications growth is over. People won’t be applying to buy houses at nearly the same rate as the coronavirus will limit human meetings. Seattle should see a major drop in business activity in in next few weeks.
Very Strong ISM Non-manufacturing PMI
ISM non-manufacturing PMI was very strong. This will be its last great reading as services activity will be hurt by the coronavirus. PMI will likely fall to the low 50s in March. February report showed the PMI rose from 55.5 to 57.3 which beat estimates for 55 and the highest estimate which was 56.
You can see in the chart below this was one of the better readings of this expansion. This is yet another example of the economy showing itself to have been in fine shape before the coronavirus hurt activity.
This PMI is consistent with 3% GDP growth. That's even stronger than the Atlanta Fed Nowcast which expected 2.7% growth as of March 2nd. Business activity index fell from 60.9 to 57.8, but the new orders index rose an astounding 6.9 points to 63.1.
Employment index rose 2.5 points to 55.6. Jobless claims in the week of February 29th fell from 219,000 to 216,000. So far, this is no indication of labor market weakness because of the virus. That will likely change in the next few weeks.
Just like in the manufacturing ISM report, prices fell 4.7 points to 50.8, inventories rose 7.4 points to 53.9, and backlogs rose 7.7 points to 53.2. There are bad supply chain disruptions. In the comment section of this report, 3 out of 9 firms mentioned the coronavirus. That’s more than the manufacturing report because manufacturing is more impacted by China. In the past few weeks, the threat has been growing in America which means more firms will mention it in the next services ISM report.
A healthcare and social assistance firm stated, “Because of the coronavirus, we are looking at major back-orders in masks, gloves, and PPE (personal protection equipment). A lot of the masks are manufactured in China, so not only are we facing a shortage because of the virus, there is a drastic shortage because the masks are manufactured where the virus originated.” Kroger is limiting the number of cold, flu, and sanitization products shoppers can buy because of high demand.
Conclusion
Coronavirus is only starting to impact the data. By the time the data fully reflects the weakness, stocks will move higher. You’ve seen that play out in China which has a roaring stock market even though its data is terrible. It can only improve from here.
Really bad economic data in America won’t come out until April when the March reports show up. There are only 197 coronavirus cases in America. But fear is already ramping up and impacting consumer spending. It will only get worse when the number of cases gets over one thousand and it spreads throughout the country.
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