Economy

As China's Manufacturing PMI Hits Record Lows, Coronavirus-Linked Recession Concerns Rising

Jon C. Ogg

Published: February 29, 2020 9:49 am

Last Updated: February 29, 2020 10:09 am

It was no secret that China’s economy was shut down for much of February. Manufacturing facilities, retail locations, public venues and offices were more or less closed for the month due to China’s efforts to contain the COVID-19 coronavirus. China released its Purchasing Managers Index (PMI) for February, and what was expected to be a very bad report showed an even worse reading.

February’s PMI reading came in at 35.7, down handily from an already weak 50.0 reading in January. This was far worse than the 45.0 consensus target issued by Econoday and the 46.0 consensus published by Reuters. The shutdown effect from the coronavirus created the fastest slowdown rate in China in modern history. It was expected a month earlier, before the coronavirus news was as dire, that China would be rekindling its growth due to the phase-one trade deal with the United States it signed.

Similar to U.S. and other international PMI readings, the 50.0 level is the line that marks break-even. Above 50 represents growth and below 50 represents economic contraction. The production index fell to 27.8 from 51.3 in January, and the new orders reading fell to 29.3 from 51.4 a month earlier. While factories and stores have started to reopen for business, many workers have been unable to return to work due to travel restrictions and quarantine rules.

The setup here coming into the PMI announcement was obviously bad, and it seemed very hard to imagine how China would even hit the consensus estimates. When you shut all regional transportation and when flights in and out of the country are all but grounded, and then add in all the closures, there is no way to avoid economic contraction. That said, this dismal report from China blew out even the worst expectations.

What international watchers need to consider here is how this awful reading will pan out of the coronavirus counts were to double, triple or grow even more exponentially in the nations outside of China, and in the United States, as the warnings have come from Centers for Disease Control and Prevention (CDC).

The domestic cases, aside from travel-related cases that have resulted in quarantine, are still just a few in the United States, even if that number has started rising in the last days of February. The cases from Italy, Iran, Japan and South Korea have been the largest reported growth nations for the coronavirus, and dozens of nations have reported a few cases, with those numbers expected to rise as well.

Economists will have every reason to worry about negative gross domestic product (GD) in China. Whether that will last and create an actual recession, or a technical recession, remains to be seen. A lot will depend on how many more cases occur and what the impact from closures and consumer activity will be. Companies like Starbucks, McDonald’s Yum China, Apple, Procter & Gamble, Coca-Cola, Jabil, Microsoft and more than can easily be counted have all warned about their earnings results due to China’s closure. Ditto for anything tied to hotels, airlines and cruises.

As for the United States, the stock market already has faced its black swan event, as this past week’s market selling was the worst since the financial crisis. The 357-point decline in the Dow Jones industrials and the 24-point decline in the S&P 500 from Friday almost felt like a win, considering that the Dow lost 16% of its value from the peak in just about two weeks. The Federal Reserve had been expected to keep interest rates steady for most of 2020 just a week or two ago, and now the financial markets have priced in two or three rate cuts. Fed Chair Jerome Powell even issued an unscheduled “we are paying close attention and can act if needed” statement on Friday.

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For now, it remains to be seen whether the U.S. economy will face anywhere close to the same interruptions and the same magnitude of weakness that has been seen in China. A lot depends on how high and widespread the number of coronavirus cases becomes, whether businesses and schools close and whether consumers keep buying the same things they normally buy. Some companies already have begun urging employees not to travel, and the travel website and tech/software providers already warned that bookings were down and that cancellations have risen in the United States.

It is still too soon to make the dire prediction of a formal recession in China, let alone the rest of the world. That would require these economies to be shut-in for far longer than is expected. That said, every global forecaster, from S&P to Moody’s to brokerage firms, that makes GDP forecasts has issued some sort of warning about how the coronavirus outbreak is hurting GDP numbers and local economies.

A lot depends on just how bad things get outside of China, and whether China’s containment efforts really worked, before the recession calls will become more realistic. There is also a broad difference between China’s manufacturing-driven economy and the U.S. dominance of close to 70% consumer spending activity for our own GDP.

There is also a fair debate over just how effective it would be cutting interest rates if the public is scared that they will get sick. Will a lower interest rate make consumers more confident to get on planes, go out to gatherings and leave home for public venues, stores, schools, restaurants and the like? Here are eight non-traditional stimulus tools other interest rate cuts than that the Federal Reserve and government can use to try to keep the economy going.

Some additional information:

• These foods have the longest shelf life.
• Some stocks that are not buckling under coronavirus fears.
• Safe dividends during the coronavirus outbreak.
• Tanking smartphone sales due to the coronavirus.
• The top-selling canned foods in America.