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First Cut: Kansas City Fed Manufacturing Index hits record low in April

The Kansas City Fed’s Manufacturing Index for April hit a record low of -30, surpassing even the worst readings of the Great Recession. However, the index for six months from now rose to -6 in April after -19 in March. Survey respondents’ comments indicated widespread and deep declines in activity, but also some relief from programs like the PPP to help keep workers from being laid off. There was some cautious optimism that essential businesses would weather present storms, and some were looking into converting manufacturing to things like protective equipment which is in high demand. The tone also suggested that most are guardedly hopeful that the downturn will be relatively short.

The index for new orders plunged to -64 in April after a steep drop to -38 in March. Order backlogs were cleared out with the index at -54 after -41.  The export orders index was down to -29 in April after -18 in March, consistent with a dearth of new orders from abroad while the global economy is dealing with the COVID-19 pandemic.

Shutdowns in production here and abroad have extended delivery times with that index at 26 in April after 13 in March. Inventories are on the decline at -14 in April after -12 in March while business are careful not to allow goods to accumulate during what is likely to be an acute recession.

The index for employment was not much changed in April at -34 after -32 in March. Businesses are holding on to workers where they can, but layoffs are common and new hiring is at a standstill. Factories have cut the workweek to the bone with the index at -51 after -15 in March. Energy related businesses seem to have been particularly affected with the collapse of crude oil prices.

The index for prices paid in April was down only slightly at -16 after -13 in March. Prices received fell to -14 from -6.  Both were at levels consistent with recessionary conditions. Also, the survey was taken before the most recent reports of oil prices actually falling below $0, however briefly. Even so, prices paid and received have both been quite weak.

The Kansas City-ISM equivalent index was down to 35.5 in April from 40.9 in March. The index has a decent correlation (0.755) with the ISM Manufacturing Index and points to the 49.1 of March being pulled lower into contractionary territory. An ISM index isn’t considered recessionary until it is around 45, which would not be a stretch to forecast for the April data when it is released at 10:00 ET on Friday, May 1. In any case, with three of the five District Bank surveys pointing to significantly slower activity and the other two expected to do the same, conditions in manufacturing overall are struggling against the tide.

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