ISM Survey Offers Fool's Gold to Investors as Oil Inventories Paint Bleak Picture of Outlook

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A widely watched and highly influential Institute for Supply Management (ISM) survey of the U.S. manufacturing sector offered up fool's gold to investors on Wednesday just ahead of an oil inventories disclosure that appeared to paint a bleak picture of the economic outlook. 

The ISM PMI dipped one percentage point from 50.1 to 49.1 in March, the institute revealed on Wednesday, when markets had been anticipating a much steeper fall to at least 44.9. This was a remarkable result for the manufacturing sector of an economy that's now widely expected to contract in the first quarter and by a large double-digit percentage come the second quarter. 

Wednesday's survey painted a picture of resilience among U.S. manufacturers although the headline number is misleading and amounts to little more than fool's gold for those who might still be hoping the economy can avoid a brush with a major downturn. This is largely because all but one of the survey's sub-indices fell steeply during the March month, the impact of which was offset by a design flaw that led the barometer to indicate resilience in manufacturing when in fact, activity has fallen through the floor. 

"The main reason for the only modest decline in the composite index was because the measure of suppliers' delivery times moved up, although that lengthening of lead-times clearly isn't a good thing in this instance. Because of these details and the further weakening of the economy seen since the majority of replies likely came in, we would expect the headline print to weaken markedly next month," says Andrew Grantham, an economist at CIBC Capital Markets. 

PMI surveys measure changes in industry activity by asking respondents to rate conditions for new orders, production, hiring intentions, prices and inventories. A number above 50.0 indicates industry expansion while a number below 50 is suggestive of contraction. The survey results often correlate with official measures of output, although they can often be wide of the mark too.

The problem in Wednesday's ISM survey results is the supplier deliveries component, which showed delivery times increasing sharply last month. The survey is designed to interpret such outcomes bullishly and as if they're indicative of demand-related capacity constraints restricting activity, but U.S. supplier deliveries are this time being delayed and otherwise disrupted by the coronavirus pandemic and fact that 'lockdowns' as well as other social distancing measures are preventing many people from working. 

A similar phenomenon has been seen elsewhere and in PMI surveys compiled by other providers of late too. 

"Today delivery times are extended because of the supply shock relating to Covid-19 with firms struggling to get inputs from China and increasingly from domestic suppliers because of company shutdowns, which is clearly a bad situation. As such, the ISM headline is painting an overly rosy picture right now and this helps to explain why non-manufacturing surveys are performing far worse than the manufacturing equivalents around the world," says James Knightley, chief international economist at ING. 

Coronavirus and efforts to contain it are increasingly incapacitating the global the economy, having brought economic powerhouses like New York City to a standstill in recent weeks as citizens 'shelter in place' in order to avoid or otherwise limit transmission of the deadly viral pneumonia disease that's spread rapidly across the globe since escaping the borders of China in January. 

All U.S. states have implemented some form of restrictions on everyday life while President Donald Trump gave up this week on his earlier ambition to "reopen the economy" in time for the Easter holiday. And this is at a time when other major economies are also at a standstill with many of the largest cities in the developed world, including hubs of global finance, having turned desolate. 

"This is very much the calm before the storm. Even though the service sector will bear the brunt of the hit from the lockdowns now in place, manufacturing confidence looks set to fall considerably further this coming month.  Meanwhile, the recent surge in initial jobless claims points to a sharp decline in employment," says Rupert Thompson, chief investment officer at Kingswood, a London-based investment manager. 

Wednesday's Energy Information Administration oil inventories report gave a taste of what might be just around the corner for the economy, with U.S. oil inventories having rocketed by more than 13 million barrels in the last week along. Oil inventories rose 13.8mn barrels last week, up from 1.6mn barrels previously. That was the largest one week gain since 2016 and one so large that such increases were not seen even during the financial crisis of 2008. 

Quite how hard all of this hits the U.S. and global economies remains to be seen, although some say the second-quarter decline in U.S. GDP could be in the high double-digits, which would be further bad news for the global economy given the U.S. is a net importer of goods and services.