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On the radar: Five District Bank surveys of manufacturing and services add up to one thing: recession

Now that all five District Bank surveys of manufacturing and services for April have been reported, it is possible to get a better sense of what might happen when the ISM Manufacturing Index is reported at 10:00 ET on Friday, May 1 and the Non-Manufacturing Index at 10:00 ET on Tuesday, May 5. No one survey is a consistent predictor of the direction and magnitude of the move in the ISM numbers. However, if I average the headline index of the five surveys, the results have high correlation with the national reports.

The regional reports are out of the New York, Philadelphia, Richmond, Dallas, and Kansas City Feds. While the manufacturing survey structures vary, they tend to mirror each other and the ISM survey. On the other hand, service sector surveys can vary quite a lot in what they ask respondents, so it is harder to compare activity in District economies with that at the national level.

The average of the regional manufacturing indexes has a high (0.950) correlation with the ISM Manufacturing Index.

The past month or two of data has seen extraordinary declines in manufacturing activity and the regional surveys reflect that. The arrival of COVID-19 and measures to prevent its spread forced widespread shutdowns in activity. While some regions were more deeply and immediately affected in March, by April all were feeling deep impacts that were reflected in the respective surveys. At the national level, the ISM Manufacturing Index hovered just around the neutral 50-mark for the January-March period after a mild downturn for the factory sector mild downturn in August-December 2019 that did not signal recession for the broader economy. I anticipate that will change with the April data.

The ISM says, “A PMI® above 42.8 percent, over a period of time, generally indicates an expansion of the overall economy.” By extension, anything below that – over time – is likely a recession. The average of the regional survey indexes was at -58.3 for April after -23.8 in March. This suggests to me a cumulative deceleration in activity, particularly in that it was an absence of orders with no backlogs to take up even a little of the slack. The Bloomberg survey median forecast for the ISM Manufacturing Index is for 36.9. I think it is a reasonable estimate and might put my number at 35.0. In any case, this is an unmistakably recessionary reading.

The average of the regional service sector indexes isn’t as good as that for the factory sector. However, its correlation (0.850) with the ISM Non-Manufacturing Index is a solid one.

The regional surveys for services for April are all pointing in the same direction. All had massive declines with the exception of the Dallas index which took its big plunge in March. In April, consumers stayed home and spent far less on services, in part because stores and businesses were closed. Businesses were largely shuttered while they tried to figure out work-arounds and contingencies to get through the mandated distancing. Lack of orders meant lack of revenue and lack of revenue means job cuts. Some was mitigated by government programs to help retain workforces. But overall activity ground to a near standstill outside of essential services.

The average of the five service survey indexes fell to -79.9 in April from -28.4 in March. The ISM Non-Manufacturing Index for March actually held on to expansion for a 122nd straight month. That will end in the April report when it is released. The ISM said, “An NMI® above 48.5 percent, over time, generally indicates an expansion of the overall economy.” It is too early for a median market forecast for the report, but a steep decline from the 52.5 in March is a reasonable expectation. A reading of around 35.0 is not out of the question.

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