With the US economy having entered recession, investors were braced for weak manufacturing data today. The report released this morning at 10am ET clearly showed the pandemic has negatively impacted the sector, but the headline number was actually quite a bit better than economists had forecast.

The Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) for manufacturing dipped to 49.1 in March, down from 50.1 in February, as shown in the chart below. The reading is consistent with only modestly slower manufacturing activity, and is well above the low 40s levels historically consistent with recession-type levels of activity.

View expanded chart.

There are several big caveats here. One is that the forward-looking new orders component, at 42.2, did fall to recessionary levels. Two, part of the strength was a quirky increase in supplier delivery times. Clearly, supply chain bottlenecks cannot be directly translated into manufacturing strength in the current environment, though they may support wholesale prices. Third, many respondent to the survey replied during the first part of the month. Clearly, conditions changed rapidly over the past week or two as stay-at-home and social distancing orders broadened.

The manufacturing sector does not represent as big of a piece of the US economy as it did decades ago, but it has historically been a good signal for corporate profits, which is why we pay close attention to it. Recessions historically bring 15-20% downside risk to earnings, certainly a reasonable prediction at this point.

“S&P 500 earnings per share in 2020 could potentially come in 20% below last year’s $163 figure, if not lower, based on the average historical haircuts to earnings during recessions,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “Even though today’s headline manufacturing data surprised to the upside, much of our services-led economy has grinded to a halt, which significantly impairs the near-term outlook for corporate profits.”

The market’s focus will next turn again to the job market, with another unfortunate multi-million surge in jobless claims likely coming tomorrow, followed by March payrolls data on Friday which will almost certainly end the longest-ever streak of monthly job gains. More on that later this week.

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