U.S. business gauge tumbles to lowest since 2013 on virus

U.S. business activity shrank in February for the first time since 2013 as the coronavirus hit supply chains and made firms hesitant to place orders, a warning sign that the outbreak is starting to dent the world’s largest economy.

The IHS Markit purchasing managers’ index measuring composite output at factories and service providers fell by 3.7 points to 49.6, the lowest level since October 2013, when the U.S. government shut down, according to preliminary figures released Friday. Readings below 50 indicate contraction.

The 30-year Treasury yield touched a record low and U.S. stocks extended declines in the minutes following the release. The S&P 500 index was on track to record its first weekly drop this month.

It’s the first major piece of U.S. economic data to show a sizable hit from the coronavirus. Economists see the virus as generally cutting more into Asian countries’ growth. Similar indexes in Japan and Australia also weakened, likely cementing the disease’s economic impact as a key topic at this weekend’s meeting of Group of 20 finance chiefs.

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,” IHS Markit economist Chris Williamson said in a statement.

The epidemic has so far killed more than 2,200 people, mostly in China, and infected more than 75,000. The spread is accelerating outside of China, whose adjustments to the number of cases have raised questions about the reliability of the data.

The stumble in the IHS Markit survey was led by service providers, whose new orders registered the first contraction in data going back to 2009, while the manufacturing PMI fell to a six-month low of 50.8. Companies in both sectors noted reluctance among clients to place orders amid the global virus scare.

White House economic adviser Larry Kudlow said Friday that the virus is only hitting the U.S. economy in a “small way.”

“So far, it does not look like—whether it be supply chain or other problems—that the U.S. economy is getting hurt in any significant way. In a small way yes, in a significant way no,” Kudlow said in an interview on CNBC He said it does not seem to be a “major blow.”

The Markit composite index showed new exports contracted for a second month and hiring slowed.

The main focus of the economic pain is in Asia, where numerous reports indicate the impact, at least in the short term, could be severe. Manufacturing in Japan shrank the most in seven years in February, according to a report Friday, while early export orders for South Korea showed a slump in Chinese demand.

In China itself, car sales sank 92% in the first half of February, and the Commerce Ministry said trade and inbound investment would take an increasing hit.

Europe showed a bit more resilience to fallout from the virus. The PMI for both euro-area manufacturing and services edged higher this month, defying expectations for a decline. However, business sentiment dipped slightly, and there was a stronger decline in export orders. If the virus impact continues to build, that weakness could intensify, hurting European business.

In the U.S., companies also expressed concern about a wider economic slowdown and the 2020 presidential election, which could result in a Democratic victor who takes policy in a different direction from Donald Trump. At the same time, firms were optimistic that the slump would be temporary, according to the report.