Here's Why You Shouldn't Panic Over China's Factory Slowdown
Chinese manufacturing activity slumped to a record low in February as the coronavirus outbreak temporarily shuttered plants and factories and travel restrictions impacted the supply of labor. The official government purchasing manager’s index (PMI) fell to 35.7, down from a neutral 50.0, while the private Caixin PMI posted a 40.3, also an all-time low in the manufacturing gauge’s 16-year history.
What this seems to suggest is that the epidemic has had an even bigger impact on China’s economy than any other crisis of the past decade and a half, including the global financial crisis. The services PMI fared even worse, falling to 29.6 in February from 54.1 the previous month.
U.S. factories were more resilient, with the Institute of Supply Management (ISM) PMI slipping to 50.1 in February from 50.9 a month earlier. But remember, the U.S. didn’t confirm its first case of the virus until the end of January, or about a month after China first reported it. As I write this, there are more than 160 cases of COVID-19 in the U.S., businesses are advising against corporate travel and supply chains are being disrupted. Therefore, it’s highly probable that the U.S. PMI will fall back into contraction in March, with potentially massive implications on energy and commodity demand.
Largest Commodity Demand Shock Since 2008?
The fallout from the coronavirus has already taken a big toll on energy. Oil lost as much as a quarter of its price in the first two months of 2020, making this the worst start to a year since the first Gulf War in 1991.