The impact of the coronavirus is showing up on the doorsteps of Minnesota factories and other Midwestern manufacturers, a harbinger of how the spread of the illness could ripple through the broader U.S. economy.
Four in 10 supply managers in a nine-state region from Minnesota to Arkansas reported negative business effects from the illness in February, according to a monthly report from the Creighton Economic Forecasting Group.
Manufacturing imports plummeted for the month due to factory shutdowns and quarantines in China, and about 27% of companies had been forced to cease or reduce international buying.
A quarter of supply managers said their firms had switched to domestic vendors for inputs to their operations.
"This is front and center where you'd expect to see most concerns," said Ernie Goss, director of Creighton University's Economic Forecasting Group, who said he was surprised to see how widespread the business challenges had become for manufacturers, and the speed of the coronavirus' effect on operations.
"The real key would be can you get inventories, can you get raw materials and supplies?" he said. "There are some indications that it made it more difficult."
Manufacturing is a leading indicator of the health of the economy in the Midwest. The Creighton forecasting group's overall index, known as the Mid-America Business Conditions Index, assesses new orders, production or sales, employment, inventories and delivery lead time.
Manufacturing continued to expand in February, according to the index, but growth is slowing in part due to the coronavirus. Any index greater than 50 indicates an expanding economy during the next three to six months.
Across the nine-state region — Minnesota, the Dakotas, Arkansas, Iowa, Kansas, Missouri, Nebraska and Oklahoma — the index for February was 52.8, down from 57.2 in January, which was the highest level in 11 months.
Minnesota's index was 53.3, down nearly five points from January. Many of the state's biggest agricultural and manufacturing players, such as Cargill and 3M, rely on global sourcing and have an outsized effect on the measure, Goss said.
During the past 12 months, Minnesota manufacturing employment growth ranked next-to-last in the region, contracting by minus 0.5%, according to Bureau of Labor Statistics data cited by Goss in the report.
Yet the state's businesses continue to respond to a tight labor market. Wages grew by the second-fastest rate in the region, rising 6.3%, according to Bureau of Labor Statistics data Goss cited.
Minnesota's survey also showed potential for future growth, with new orders at 64.9 on the index.
National numbers from the Institute for Supply Management, also out on Monday, showed that production was growing, but that new orders and employment are contracting. It uses a broader array of industries and noted that global supply chains are feeling the squeeze above all of the manufacturing industry sectors.
The February index for production manufacturing inventory registered 50.1, down from 50.9 in January.
The national numbers didn't address the impact of the coronavirus, but Goss said results from a specific survey on the outbreak could come this week. Goss suspects Midwest manufacturers are feeling more pinch than will be reflecting nationally.
"This part of the country is pretty globally linked," he said.
Supply managers from the Mid-America region said the coronavirus outbreak in China forced factories to "dual source," although they said that doesn't necessarily mean switching to domestic vendors.
Others spoke to lead times for electronic components being pushed out because of the economic slowdown in China.
As a result, employment in factories across the region, including Minnesota, was down.
The coronavirus delays produced job losses, managers told Creighton in the survey. Other factors were the continued issues from trade constraints and the tight labor market.
Looking ahead six months, economic optimism is waning. The business confidence index also slumped to 51.4 from January's 58.8.
Goss said the emergence of the coronavirus offset the positive confidence impact of the recent passage of the U.S. Canada, Mexico trade agreement and Phase One of the trade agreement with China.
"The economy had been hammered by international factors over last year's [second] half and now it's getting hammered again by something very different," Goss said.
Minneapolis-based Graco, which makes industrial spray and pumping machines, said it has seen some supply-chain slowdown but has taken steps to address it. The company's factory in Suzhou and its Asian headquarters in Shanghai also are substantially back to work.
Jackie Crosby • 612-673-7335
Catherine Roberts • 612-673-4292
