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  • Writer's pictureJoe Carson

Manufacturing Rebound Too Narrow To Withstand Supply & Demand Shock From China

The January survey of US manufacturers from the Institute for Supply Management (ISM) showed a modest rebound in activity, with the composite index rising 3.1 points to 50.9, moving above the all-important 50% threshold for the first time since July 2019. While the report indicates, “sentiment this month is moderately positive regarding near-term growth” the overall improvement is too narrow and shallow to withstand a major hit from a major diversified supplier of materials and supplies as well as a big end market for many companies.

In January, only 8 of the 18 industries reported growth in the month and an equal number (8) reported declines in the month. Broad-based recoveries in manufacturing occur when the number of industries is twice or more than the number of reported declines.

The most notable industries reporting “growth” in January included computer and electronic products and chemicals. And biggest industries reporting a “decline” in business activity included electrical equipment, transportation equipment and machinery.

All of the winners and losers have large exposure to China, especially one of the winners, computer and electronic products as it gets a large amount of its supplies as well as its product assembled in China.

At this time, it is too early to assess the impact on domestic manufacturing from the stoppage of manufacturing production in China. China imports into the US range from $35 to $45 billion per month and lot of what would normally be produced in February and even March, if work stoppages last that long, would not flow into the US until the spring months. A lot of this could be a consumer related products, which impacts a number of service industries (retail) as well as manufacturers.

Also, while passenger flights into and out of China have been cancelled there are no reports that cargo flights or vessel traffic has been impacted. This could be a net positive for manufacturers, but at the same time it highlights the fact the compete shutdown of a number businesses in China goes well beyond the impact on US manufacturing.

To be sure, the cancellation of all flights between US and China for up to two months will impact a number of service industries---airlines, hotels, recreational parks, restaurants----so the hit to the domestic service sector could be as big as the hit to the manufacturing sector.

As such, it will be just as important to monitor in coming months the ISM survey of service industries along with the manufacturing survey to gauge the macro impact on US GDP.

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