U.S. Service Industries Feel Weight of Coronoavirus Uncertainty

Date: Wednesday, March 4, 2020
Source: The Wall Street Journal

Surveys show disruptions in sourcing materials and declining demand in wide range of sectors

WASHINGTON—Concerns about the novel coronavirus epidemic clouded the outlook in February for U.S. businesses in service industries, posing a new risk to economic growth.

Private data firm IHS Markit said Wednesday its U.S. services index—a survey-based measure of activity in industries such as communications, finance and transportation—fell sharply last month compared with January, as firms reported declining client demand and new business from abroad.

The index fell to 49.4 in February from 53.4 in January. A level above 50 indicates expansion, while a reading below 50 signals contraction. It was the first contraction for the index since October 2013, Markit said.

Chris Williamson, chief business economist at IHS Markit, said a drop in foreign visitors and overseas sales weighed on the U.S. travel and tourism industry last month, but the slowdown in service-industry activity was wide-ranging.

“Sectors such as financial services and business services are reporting virus-related hits to demand, suggesting a more broad-based weakening of demand across the economy,” Mr. Wiliamson said.

Also Wednesday, the Institute for Supply Management’s survey results showed service-industry businesses were seeing disruptions tied to the virus in February.

Respondents reported longer lead times for materials sourced from China, where efforts to contain the virus have led to widespread quarantines and halted factory production.

“It is difficult to [make] sourcing decisions, since it is not clear how long China will need to return to normal production capacity, and if it is worth it to pay more from other countries,” one ISM survey respondent said.

Anthony Nieves, chair of ISM’s services survey committee, said coronavirus concerns generated more comments than any other topic in his 10 years of issuing the report.

“Most of it is surrounding the uncertainty of it,” Mr. Nieves said. “It’s more about the psyche and what effect [coronavirus] will have, mostly on supply chain,” he added.

The coronavirus epidemic, which originated in China, has spread rapidly in recent weeks. The global death toll now stands at more than 3,000 people, and countries including Italy, South Korea and the U.S. have reported a growing number of cases.

Responses to the epidemic have disrupted manufacturing supply chains and weighed on tourism and travel activity, with most of the impact felt in Asia. The IHS Markit and ISM data released Wednesday are among the first to reflect economic effects in the U.S.

The Federal Reserve responded Tuesday to intensifying anxiety about the epidemic by cutting its benchmark interest rate a half-percentage point, to a range between 1% and 1.25%. The cut was the first rate change made outside of scheduled Fed policy meetings since the 2008 financial crisis.

“The virus and measures being taken to contain it will weigh on economic activity here and abroad for some time,” Fed Chairman Jerome Powell said at a news conference following the emergency rate cut.

The U.S. economy had shown signs of stability before the widening of the coronavirus epidemic. The unemployment rate in January, at 3.6%, remained near a 50-year low. Consumer surveys from early February showed Americans remained optimistic about future economic conditions, and measures of business investment ticked higher in early 2020.

ISM, whose report covered the entire month of February, said service-sector business activity increased last month despite coronavirus concerns. Its services index climbed to 57.3 in February from 55.5 the previous month.

The ISM survey “does underline that economic growth was gathering momentum before the coronavirus outbreak began in earnest,” said Michael Pearce, senior U.S. economist at Capital Economics, in a note to clients.

The epidemic now casts doubt over whether that will continue. Economists at S&P Global Ratings Tuesday cut their forecast for U.S. growth in the first and second quarters of this year to an annualized 1% versus 2% pre-virus.

Beth Ann Bovino, S&P’s Global Ratings’ chief economist, said the disease outbreak “will be a material headwind to growth in the near term.”

 

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