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The IHS Markit’s manufacturing PMI fell to 50.8 vs. 51.9 in January, failing to reach the 51.5 reading forecast by the market. The services and composite PMIs fell below 50 to contraction territory, with services posting the lowest reading in six years.

Key Takeaways

• The IHS manufacturing index fell from 51.9 to 50.8 vs. 51.5 expected.
• The composite output index contracted for the first time in 13 years with a reading of 49.6 vs. 53.3 in January.
• IHS Markit Chief Business Economist blames the coronavirus outbreak for the sub-expectation readings.

The composite PMI output index dropped below 50 for the first time in 13 years, with declines in other areas seen as well. A drop in the services PMI marked the end of a near four-year expansion. New orders fell for the first time since that metric was first measured in 2009.

New export orders fell, with companies reporting increased hesitancy among clients to place orders with the coronavirus outbreak ongoing. Companies hired at a slower rate than the month before as a result, although business confidence nevertheless reached the highest level since June 2019. Confidence is still relatively low by historical standards, and business activity contracted from 53.4 to 49.4.

Input prices saw a slower pace of growth, and companies raised output prices only slightly in order to stay competitive. Inflationary pressures softened in February, with lower demand. Goods producers saw a very slight improvement in operating conditions. The improvement in the health of the manufacturing sector hit the slowest pace since August.

Lessons from 2019 for the current Coronavirus scare:
1. PMI is a better signal for manufacturing than ISM (lhs).
2. Non-man ISM is a better signal for services than PMI (rhs).
3. So take the big drop in Feb services PMI with grain of salt.
4. Services PMI is a noisy indicator... pic.twitter.com/k6GJEZqoLY

— Robin Brooks (@RobinBrooksIIF) February 21, 2020

Expert Outlook

Chris Williamson, Chief Business Economist at IHS Markit, stated “with the exception of the government-shutdown of 2013, US business activity contracted for the first time since the global financial crisis in February. Weakness was primarily seen in the service sector, where the first drop in activity for four years was reported, but manufacturing production also ground almost to a halt due to a near-stalling of orders."

Williamson stated that the decline was due to the COVID-19 virus outbreak which has disrupted manufacturing supply chains as well as demand in areas such as tourism and travel. He also cited uncertainty surrounding the upcoming US presidential election as a factor.

Williamson added that “The survey data are consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February,” although clarified that the business outlook indicated that this slowdown would be short-lived.

Market Reaction

Gold prices have seen a large upturn in today’s session. Spot gold last traded at $1,648.24/oz, up 1.69% with a high of $1,648.24/oz and a low of $1,617.68/oz. Weak manufacturing activity, an in-line drop in existing home sales, and mounting concerns surrounding the far-reaching impact of the COVID-19 virus are driving the upward selling pressure in the precious metals markets.

The IHS Markit PMI runs contrary to more upbeat data in the recent ISM reports, and the downturn in activity will have come as a surprise to some, adding to market uncertainty and risk-averse sentiment. Many traders will see the poor manufacturing performance in February as confirmation that the effects of the virus outbreak are not confined to China, and could have a major impact in many US industries as well for the foreseeable future.