Despite much debate among economists regarding if or when a recession may occur, the U.S. manufacturing sector may already be in a recession. Manufacturers have been affected by slower demand, higher borrowing costs, continued labor struggles, and continued supply chain disruptions that have contributed to declines in output. In fact, over the past eight months, industrial production has fallen six times, and in December alone, manufacturing declined 1.3%.
Likely, manufacturers’ current situations vary just like they did through the pandemic or Great Recession. This means that some manufacturers may have already begun to feel a slowdown, while others may still be experiencing strong demand. Similarly, some sub-industries seem cautiously optimistic that supply chain disruptions have resolved, while other manufacturers continue to struggle with extended lead times and rising costs. No matter their current experience, an imminent recession – whether in 2023 or beyond – should encourage manufacturers to take actions including the following:
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- Ensure adequate liquidity. Manufacturers should always ensure that they have access to enough cash to support ongoing operations of their business. This may include the appropriate amount of cash to cover one or multiple payroll cycles and/or a month to several months of other fixed costs. Depending on your normal cash cycle, some businesses may need a significantly larger reserve than others.
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- Communicate. Talk to your vendors and customers. Anticipate changes that could affect your business, such as changes in lead times or costs from vendors or changes in demand or payment frequency from customers. The ability to plan your business is key during any downturn.
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- Have a contingency plan. We always encourage manufacturers to have a business plan. However, having a contingency plan can be equally important. Manufacturers should understand potential events that could significantly impact their business. They should also consider the likelihood of such events occurring. Planning for, at minimum, events with a significant impact that are highly likely, can help a manufacturer know its course of action if such an event occurs.
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- Stay forward-looking. Executives must ensure that the business continues to operate in a way that meets shareholder expectations. During challenging times, it can become easy for executives to focus on what is happening now. This can leave the business unprepared to mitigate upcoming challenges or capitalize on new opportunities. Executives must ensure that they balance their focus on the present and the future.
- Don’t lose sight of improvement opportunities. Fears of business downturns can affect a manufacturer’s interest in investing in new technologies. For instance, manufacturing leaders have reported that past recessions have derailed their progress on implementing Industry 4.0 technologies. While some businesses may need to change plans to conserve cash or reduce risk associated with introducing new capabilities, improvement or innovation may be needed for a business to earn the best long-term results.
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