Business activity declined dramatically in New York state in early April, according to the Federal Reserve Bank of New York’s monthly survey of manufacturers there.
The general business conditions index in the Fed’s Empire State Manufacturing Survey, released Wednesday, reflected a steep decline in business activity in April to -78.2 compared to -21 in March. This is the second month in a row that the results of the survey significantly undershot expectations. The April index is also the weakest on record, far exceeding the drop to -34.3 during the Great Recession. While the outbreak has hit the New York region harder than most, mandated shutdowns of non-essential activity across the country will likely mean similar precipitous drops in other regional manufacturing indices, too.
New orders, shipments, employment and work hours all declined at a record pace amid dismal demand and business conditions, the survey results show. Manufacturers in New York expect only a slight improvement in the second half of 2020. Expectations for capex and technology spend suffered most. Given weak demand and profit conditions and spare capacity, companies may have little incentive to undertake investment projects at this time, which would also impact the speed of recovery.
U.S. industrial production sees its largest drop on record
Along with the dim Empire State Manufacturing Survey results, total industrial production in the United States dropped in March by 5.4% month over month, according to data released Wednesday by the Federal Reserve. This reading came in worse than the market consensus for a decline of 4.2%. Capacity utilization in the same period fell to 72.7% from 77%, the Fed’s data shows.
“Manufacturing output fell 6.3%; most major industries posted decreases, with the largest decline registered by motor vehicles and parts,” the Fed said. “The decreases for total industrial production and for manufacturing were their largest since January 1946 and February 1946, respectively.” The March plunge was led by a 28% drop in auto output.
Further big drops are likely in April, because government-imposed lockdowns mostly began in mid-March. Total production fell by less than manufacturing output because the declines in utility and mining output — due to falling demand — were relatively modest, at 4% and 2% respectively.
The chart below shows that U.S. industrial production has dropped significantly in a very short period.
Worst yet to come
The plunge in the New York Fed’s manufacturing survey index in April was more than double its worst results on record, which were during the Great Recession. Likewise, the recent collapse in manufacturing output was much bigger than the 3.5% drops in September and December 2008, the worst months of the Great Recession. Taken together, these two reports show the outlook is dreary for America’s industrial sectors. We expect major supply chain disruptions, reduced energy activity due to manufacturing declines, and tighter financial conditions to represent major headwinds in the coming months and the April numbers are expected to be terrible.
In this depressed economic environment, companies will need to focus on ways to access cash to keep operations going now and in the future, while managing the increasing uncertainty and unknowns related to supply and demand.