Over the past two years, manufacturers have experienced a variety of economic conditions, from the temporary suspension of operations to extreme demand increases that affected companies’ abilities to supply. Supply chain disruptions and labor shortages have compounded problems for manufacturers, driving up costs and leading to inflation rates that have not been seen since the 1980s. To temper inflation and adjust its monetary policy, the Federal Reserve increased interest rates by .25 percentage points in March. This increase was the first passed since December 2018, when the Fed temporarily raised rates before cutting them the following summer. This time, it does not appear that the increase will be temporary, as the Fed has communicated its intention to continue increasing rates through 2022 and into 2023 while monitoring economic growth and inflation, much of which has been driven by the pandemic, continued supply chain disruption, and higher energy prices.
Typically, when businesses think about the impact of rising interest rates on their business, they consider their cash and financing positions. For instance, manufacturers with excess cash may earn interest on their deposit accounts, while manufacturers looking to finance purchases, such as equipment or inventory, may experience a new rate especially if they are using a line of credit or other revolving debt.
Manufacturers should also consider the impact that interest rates could have on their revenue:
- Manufacturers who produce and sell large equipment, vehicles, or other expensive goods may experience demand fluctuations quickly after interest rate hikes are announced. Increased costs of financing may cause buyers – whether consumers or businesses – to reconsider large purchases. This is especially true in times of inflation, since both the costs of the goods and the costs to finance are increasing.
- In addition, manufacturers producing component parts for expensive goods, such as equipment or vehicles, may also see demand decline. While the component good itself may not be expensive, demand for the final product may affect demand for component parts. Similarly, manufacturers producing building products for commercial or residential construction may see similar trends. Consider how your components are used and the impact rates may have on purchases of the final product.
- While a single increase rate hike may not have a substantial affect on future demand, the Fed’s projection of rate increases throughout the remainder of 2022 and into 2023 could cause overall economic growth to slow. Over the past two years, many manufacturers have been fortunate to increase revenue, as many goods have been reshored and consumer trends have changed in the wake of the pandemic. Moving forward, manufacturers may consider tempering forecasts in anticipation of a potential economic slowdown.
To prepare for possible demand fluctuations, manufacturers should consider taking the following actions:
- Communicate with your customers. Ensure that you understand their demand projections so that you can plan accordingly.
- Monitor your pricing and margins. As your costs rise, it is important to ensure that you are charging the proper price to your customers.
- Plan ahead. Be prepared for demand fluctuations, cost increases, interest rate increases, and periods of economic change. Ensure that you take prompt actions when needed to protect the financial strength of your business. Forecasts and budgets can help you monitor trends and provide information helpful to making good business decisions.
For support in determining how rising interest rates may affect your business’s future outlook, contact a member of HBK Manufacturing Solutions at 330-758-8613 or email@example.com.