May 28, 2020

Surveys Beginning to Track the Extent of Economic Contraction

EXCERPT:  A recent survey suggests that the non-manufacturing sector is contracting. Meanwhile, respondents express concern over when business will resume to normal operational levels as the COVID-19 pandemic looms.

The coronavirus pandemic has ground the economy to a halt, and the latest findings show that the non-manufacturing sector contracted last month as a result.

The coronavirus pandemic has no doubt had a significant impact on all sectors of the economy, leaving no industry immune, including the non-manufacturing sector. For the first time in over a decade, the non-manufacturing sector contracted as the COVID-19 crisis continues to ravage the national economy.

According to the most recent Non-Manufacturing ISM® (NMI) 'Report On Business' as documented in a recent article from MonitorDaily.com, economic activity in this particular sector contracted in April, marking the first time since late 2009 for this to occur and breaking a 122-month growth streak.

The survey was issued by Anthony Nieves, Chair of the Non-Manufacturing Business Survey Committee.

Non-Manufacturing Sector Caving Under COVID-19 Pressures

The NMI registered 10.7 percentage points under the March reading of 52.5 percent, with an April reading of 41.8 percent, pointing to a contraction in the non-manufacturing sector.  

The Business Activity Index dropped 22 percentage points from the prior month, clocking in at 26 percent. That's the lowest index reading since the Non-Manufacturing ISM Report On Business was introduced in 1997.

The New Orders Index registered 20 percentage points under the March reading, landing at 32.9 percent in April compared to 52.9 percent the month before. Meanwhile, the Employment Index dipped 17 percentage points under the March reading, landing at 30 percent in April compared to the March reading of 47 percent.

Non-manufacturing industries showed weakening in April, despite some growth the month before.

At the same time, the Supplier Deliveries Index registered at 78.3 percent, up 16.2 percentage points from March, marking a record high. This jump limited the decline in the composite NMI.

Supplier Deliveries is an inverted index; any readings over 50 percent point to slower deliveries, which typically occurs with a strengthening economy and an increase in consumer demand. That said, the 25.9 percentage point increase in both March and April combined stemmed primarily from issues with supply problems as a result of the coronavirus pandemic.

The Supplier Deliveries Index directly factors into the NMI, along with three other subindexes, including Employment, Business Activity, and New Orders.

The Prices Index registered at 55.1 in April, which is 5.1 percentage points higher than the reading in March. This suggests that April saw price increases.

Concerns Loom Over the Timeline of Business Resumption

The findings of the report are sparking concerns over the impact that the COVID-19 pandemic is having on the supply chain, operations, finances, and human resources. Respondents are also worried about when business will finally return to normal. Right now, it's difficult to see any light at the end of the tunnel.

Despite weakening across the non-manufacturing sector, there are two non-manufacturing industries that reported some growth in April, including public administration, and finance and insurance.

Banks and Lenders Urged to Revise Their Loan Portfolios

It's advised that banks and lenders periodically review their loan portfolios to identify any potential points of weakness and make the necessary changes to keep these portfolios strong. But under times of economic duress, this practice is even more essential.

Banks and lenders are encouraged to take a look at their books and sell off any risky assets and replace them with stronger ones that can withstand economic uncertainty and ensure a more robust and diverse portfolio. And Garnet Capital can help facilitate the transactions needed to bring strong assets on board while eliminating weak assets.

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