Over the past nearly 18 months, domestic manufacturing activity has been on the rise. Now, reports are beginning to surface indicating slower growth. Does this mean an economic recession is ahead?
Many reports indicate that this change in pace is related to supply disruptions coming from China, where a new wave of COVID-19-related lockdowns is slowing production. Further, it is anticipated that these lockdowns may continue to cause supply disruptions into the latter half of 2022 and even into 2023.
Many manufacturers are questioning whether these disruptions are the only reason that manufacturing growth has slowed. To further explore this issue, manufacturing leaders may consider watching common economic indicators that may provide some insight into the economy.
- Rate of inflation. The Federal Reserve is actively seeking to slow inflation by raising interest rates. Two 50 basis point rate hikes have been passed so far in 2022 and additional increases are expected this year. If inflation cuts into buyers’ discretionary income, manufacturers may begin to see demand weaken. On the other hand, rising interest rates increase the cost of debt, which may impact the purchasing power of borrowers. This is particularly important for manufacturers of high-end or expensive goods (or parts for such goods) to consider since purchases of these items may require financing. Therefore, manufacturers should monitor the rate of inflation and the government’s actions to slow it, as they forecast upcoming demand.
- GDP growth. Monitoring GDP growth is another way to measure economic growth. However, because GDP reports are produced retrospectively (and sometimes are later adjusted), they may not predict business activity changes with enough advance notice for manufacturers to take action. However, they can help manufacturers confirm whether changes in demand are related to a certain customer, product line, or specific business scenario or whether such changes are consistent with trends in the overall economy.
- Supply chain metrics. With the increase in supply issues, many organizations are measuring key supply chain metrics, including supplier deliveries, cargo time at ports, and changes in average lead times to indicate whether there is an improvement. Unfortunately, manufacturers remain plagued by late deliveries and rising costs. Manufacturers should consider how best to communicate potential and realized delays with their customers. Those with sufficient cash availability may consider temporarily boosting inventory levels to prepare for potential shortages. In addition, manufacturers should consider how to pass along cost increases to customers, whether by raising sales prices or passing temporary surcharges to account for the cost increases.
- Workforce availability. Unemployment rates and open jobs reports are two ways to measure workforce availability. Like supply chain disruptions, manufacturers have been faced with severe shortages in available labor. Many companies have tried to lure workers with higher wages, bonuses, increased paid time off, better benefits, or where possible, flexible work arrangements, with many positions remaining open. However, many manufacturers have struggled to permanently increase their cost of compensation, while also managing increased input costs, or determining how to handle flexible work arrangements, especially in operations that have continuous processes. As a result, manufacturers are considering other options, such as working to build internal training programs geared to skill development, utilizing external certification programs to build skills, starting internship or apprenticeship programs, or reducing labor dependency by using automated equipment.
Are you concerned about how economic growth, stagnation, or contraction will affect your business plans? Contact a member of HBK Manufacturing Solutions at 330-758-8613 or email@example.com to discuss your situation.