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What is the damage of the Coronavirus on the US manufacturing and services sectors?

What is the damage of the Coronavirus on the US manufacturing and services sectors?

31 Mar 2020 04:33 PM

It’s a busy data week for the US. In addition to the non-farm payrolls report on Friday, the release of the latest ISM manufacturing and non-manufacturing PMIs is expected on Wednesday and Friday respectively. These surveys will give us a taste of how much damage the virus has inflicted on the US economy and therefore, how deep the upcoming recession will be.

PMI readings: what to expect

The social distancing and lockdown measures taken to slow the spread of COVID-19 will undoubtedly hit companies hard across the United States, with industries such as tourism and restaurants, likely to be devastated first as consumers are told to stay at home. Until the release of March’s ISM business surveys, very few economic surveys have reflected the scope of the damage.

Forecasts suggest that the manufacturing index will drop to 45.0 from 50.1 in February, while the non-manufacturing index is expected to fall to 48.0 from 57.3 previously, giving them both contraction status. The US economy could be heading towards a recession if these numbers are correct. These sectors could contract further in the coming months as more cities and states go into quarantine and social-distancing measures are tightened.

As for these forecasts and the risks surrounding them, it’s possible that there may be a positive surprise in the manufacturing readings relative to expectations, and a negative reading in the non-manufacturing index. This was the case in the euro area, UK, and US Markit PMIs for March. Economists overestimated the initial impact on manufacturing, which seems to be holding up quite well considering, but underestimated the hit on the services sector.

Can US markets’ latest recovery continue after the surveys?

Turning to market sentiment, while the manufacturing PMI on Wednesday might not shake investors much, especially if it’s slightly stronger than the consensus, it might be a different story for the non-manufacturing reading on Friday. Remember that the manufacturing sector only accounts for just more than 10% of the US economy, 12% to be exact. Therefore, the most important variable for markets this week is how much the non-manufacturing index drops, as this will reveal how deep the damage might be.

The non-farm payroll report on Friday could also be in play, but the numbers could be outdated as they were collected in early March and therefore won’t reflect the dire developments of the past two weeks. In the case of a major disappointment, stocks could come back under selling pressure as fears of a deep recession come back into the spotlight.

And what about the US dollar strength?

In the currency markets, things are a bit different. Disappointing data typically hurts local currencies, yet the outlook for the dollar still seems positive in an environment of continued market turmoil. Lately the dollar has been trading like a safe-haven asset for investors amid the chaos, and with a global crisis now virtually certain, even worrisome economic data might not be able to hold the dollar down for long.

That said, the dollar’s performance might be mixed going forward. While the dollar could underperform against traditional safe havens such as the yen and the Swiss franc during a slump, it could outperform currencies oriented to exports such as the Australian dollar, New Zealand dollar and even the euro.

Fears of layoffs increasing

Unemployment insurance is designed to partially replace income but of the people who have lost or will lose their jobs, most will cut spending to essentials.  But that is not the only effect of the historic job losses expected from the pandemic.

Among the vast majority who retain their jobs, the impact of the crisis will cause a general reduction in spending. Many will choose to conserve their resources for an uncertain future. Closures of non-essential businesses, locally defined, in large swaths in the most populous parts of the country, will further drain economic activity.

Conclusion

Before this crisis, the US was arguably the strongest major economy, and it has since launched massive stimulus to negate the shock. In terms of economic data, the PMI readings are extremely important, and will have a big influence on what comes next. A seriously negative reading could upset the latest rebound in stocks. That being said, any drop in the dollar might be brief.

 

 

 

 

 

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