Coronavirus-related supply chain disruption is taking its toll on U.S. firms, with a recent survey of company purchasing managers showing a slump in business activity in February that’s being blamed in part on the spread of the disease.
“The deterioration was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions,” said Chris Williamson, chief business economist at IHS Markit, which on Feb. 21 published its Purchasing Managers’ Index (PMI) report.
Other factors weighing on business activity include reluctance by companies to spend on equipment and labor because of worries about a broader economic slowdown and uncertainty ahead of the U.S. presidential elections in November, the data firm noted.
The IHS composite PMI, which tracks both the manufacturing and services sectors, dropped to 49.6, the lowest in 76 months, from a reading of 53.3 in January.
A reading of 50 is the threshold between expansion and contraction, with lower numbers associated with a drop in business activity.
The manufacturing sector barely escaped a slip into contraction, with the manufacturing PMI coming in at 50.8, the lowest since August and down from 51.9 in January.
Meanwhile, the services sector PMI dropped to 49.4 this month, the lowest since October 2013 and the first time since 2016 the index slipped into contraction territory.
Small Business Disruption
While big corporations have dominated the virus-related business disruption headlines—an example being Apple’s recent earnings downgrade announcement that caused its stock to dip and drove broader risk asset selloffs—small businesses in the United States may be just as vulnerable.
“Small businesses, particularly retail, will likely see an issue in regards to keeping inventory,” said Brandon Renfro, assistant professor of finance at East Texas Baptist University, in an emailed statement to The Epoch Times. “If factories in China are shut down, that means the local retailers who carry products manufactured in China can’t restock. For a very small business, the issue is even worse because what large corporations call quarterly profits, small business call food and utilities money. They just often aren’t as capable of weathering a squeeze.”
“It’s just a broken-down supply chain,” Becky Feinberg-Galvez, owner of Shop4ties, told The Wall Street Journal, adding that the company had to turn away dozens of orders for its products—which include custom-branded neckties and shirts manufactured in China—due to supply-chain disruption. Feinberg-Galvez told the publication that one Chinese subcontractor the firm relies on has been shut down completely, while the factories of two other partners were operating at below 50 percent capacity.
“Now, U.S. firms may more seriously consider onshoring manufacturing capacity in order to limit further disruption from global supply unpredictability,” said Jimmy Hinton, senior managing director at Transwestern, in an emailed statement to The Epoch Times.
Hinton noted that may lead to a rush by retailers to stockpile inventory as a hedge against more disruption.
“Retailer strategy may tilt to over-stocking products, improving both capacity utilization of warehousing space and potentially increasing demand for related space across strategic logistics-driven markets,” he said.
G-20 Overshadowed by Virus Worries
Finance leaders of the world’s top 20 economies wrapped up their two-day meeting Feb. 23 that was dominated by growing concern over the widening fallout from the coronavirus outbreak.
The Group of 20 finance ministers and central bank heads faced a sober presentation by the International Monetary Fund, which predicted that the epidemic would shave 0.1 percentage point off global growth.
“In our current baseline scenario, announced policies are implemented, and China’s economy would return to normal in the second quarter. As a result, the impact on the world economy would be relatively minor and short-lived,” IMF Managing Director Kristalina Georgieva said on Feb. 22.
“But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted,” she added.
Reuters contributed to this report.