- The Institute for Supply Management’s (ISM) Non-Manufacturing Index dropped by a 10.7 points to 41.8 in April, falling deep into contractionary territory. The headline number was slightly better than consensus expectations, which called for the index to fall to 38.8.
- Three out of four main subcomponents slumped deeply in the month. Business activity subcomponent dropped to 26.0 from 48.0 – the lowest print on record. Demand was weak as stores remained closed and households stayed home, with new orders declining to 32.9 from 52.9 – also the lowest since data collection began. Hiring followed suit, with employment subcomponent tumbling to 30.0 from 47.0.
- Meanwhile, supply-chain disruptions led to another large increase in supplier deliveries index to 78.3 (from 62.1 prior), pointing to significantly slower deliveries. This is distorting the headline index in the current environment, making it a less reliable indicator of economic activity.
- Personal protective equipment, disinfectant and other medical supplies were in short supply, pushing prices higher. As a result, the overall prices-paid subcomponent rose by 5.1 points to 55.1.
- Trade indicators were mixed: import orders improved to 49.3 (from 40.2), while export orders fell to 36.3 (from 45.9).
- Not surprisingly the vast majority of industries reported contracting activity. Only two out of 18 industries surveyed cited growth in April, down from 9 in March. Industries reporting growth were public administration, and finance & insurance.
Key Implications
- As expected, mandated business shutdowns and social distancing rules have led to a massive contraction in services sector activity in April, with hardly any industries spared. While the headline number was not as bad as expected, it continues to be distorted by an unprecedented increase in supplier deliveries index due to supply chain disruptions. Without this, the overall index would have fallen even deeper into contractionary territory, since its business activity, new orders and employment component are now all at the lowest levels since data collection began.
- While today’s number is grim, sentiment should improve somewhat in May with a majority of states planning to partially re-open by month’s end. While an improvement, this will not be a return to normal, with re-opening likely to be very gradual and with considerable restrictions. The hit to employment and income is expected linger, so even as businesses reopen, consumers will keep a tighter grip on their purse strings. There’s also a question of if and when will consumers feel safe enough to return to their old habits. Evidence from some European economies which have begun to re-open, suggests that consumers remain very cautious. As a result many businesses may have to operate below capacity for months to come.
