Highlights from the February 16, 2023 HBK Manufacturing Solutions webinar hosted by James Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions; and Amy Reynallt, MBA, CMA, HBK Senior Manager.
Watch On Demand.
Industrial production fell in six of the last eight months of 2022 with the worst or most significant declines in November and December.
Manufacturing is the largest section of industrial production, about 75 percent, and declined more than industrial production as a whole. Challenges to manufacturers included slower demand, higher borrowing costs, and fear of a recession.
Slower demand – demand is lessening based on the industry sector; more normalization in some segments after the high demand during the pandemic
Fear is causing conservation of cash, even slowing research & development as companies test the waters before making substantial changes
Initial figures show an increase in production January 2023. Generally, there is still an overall decline, though with some good news mixed in.
Is manufacturing in a recession?
Capacity utilization is down, to 78.8 percent in December 2022.
Some manufacturers saw robust growth during the pandemic and are now seeing declines below those levels.
Many manufacturers predict a recession and therefore are better prepared: looking at ways to prevent layoffs; w ant to balance fear with preparation. They learned through the Great Recession in 2008 and 2009 how to better handle a recessionary period.
Institute for Supply Management report
The ISM index fell in January for the fifth consecutive month; recruiting and retention have become primary areas of focus.
Below 50 for the past three months, signaling a contraction in manufacturing orders
Contraction is combating inflation; there have been some price declines since October. Supply chain disruptions are still affecting other areas, but for more of our clients, disruptions seem to be easing. As such, some of the ISM survey data are not representative of what our clients are facing in their markets.
Seeing employment growth in five areas: nonmetal mineral products, machinery, plastics and rubber products, transportation equipment, and fabricated metal products
Other areas are generally holding employment levels or even laying off.
It is easier to hire now than in previous months.
As baby boomers retire, younger people are moving into management positions and need training and education to be able to manage effectively. Those extra efforts to train and keep workers, to “upskill” them, have become more important in recent years.
Interest rates have skyrocketed. The Federal Reserve has increased rates eight times since March 2022, and rates are now the highest they have been since October 2007. Additional increases are expected this year.
The goal is to slow inflation.
Higher rates affect capital heavy businesses more.
Overview of economic status
The manufacturing sector is likely already in a recession.
Some challenges remain, but generally to sub-industry sectors or geographically specific.
At best we are retuning to more normalized conditions and will not experience full recession.
We recommend manufacturers keep an eye on what’s happening, understand how your business and your customers will be impacted by either recession or normalization.
National Association of Manufacturers’ Perspective
A 2022 NAM survey:
62 percent of manufacturers expected a recession. Contributing factors include Congress failing to act on essential tax reforms, like R&D credit and bonus depreciation.
Top concerns include workforce shortages—there were 779,000 manufacturing jobs open at end of 2022—supply chain disruptions, and increased raw material costs.
What are manufacturing planning to do to get through these uncertain economic times?
Purchase new equipment/technology: more about improving existing capabilities than adding new
Upskill and train existing workforce
Hire new employees
Invest in R&D
Invest in new structure and existing facilities: some manufacturers have fallen behind through 2021 and 2022; consider cost segregation study to move investments into shorter depreciation periods to create tax savings and additional capital to invest; best benefits are to heavy and light manufacturing.
Five topics of interest to manufacturers in 2023:
Status of the economy and being prepared for what lies ahead; recalling effects of pandemic and Great Recession
Cost pressures: higher inflation continuing; pressure coming from suppliers but also from customers concerned about a recession and looking for relief as many manufacturers passed along increased costs to customers; expect push back
Energy price volatility – expected to continue, in particular for electricity
Overall theme: there is uncertainty so manufacturers have to prepare for that in their business plan, which are key in times of uncertainty.
Need an active recruiting and retention initiatives.
Second chance hiring: look at nontraditional sources for employees, including part-time.
Expect an ongoing shortage of skilled workers:
Need upskilling and reskilling programs
Look for government sponsored programs to support education initiatives, like Ohio’s Tech Cred program
Compensations package increases: seeing more competition for workers including in areas not seen before, like warehousing.
Wages rose in Ohio by 1.3 percent in Q3 and Q3 and 1 percent in Q4 2022; 5.1% year over year is the fastest pace on record.
Benefit costs rose 3.8% in 2022 in Ohio; total compensative expense increased 4.7 percent; demand for additional benefits are important considerations for manufacturing; be open-minded and think outside the box about compensation.
Flexible work arrangements have become more widespread
There is concern that labor issues might lead to more outsourcing, but we’re not seeing it top-of-mind; there have been huge challenges getting products into the country for those who are outsourcing
Supply chain trends
Backlogs, especially from overseas suppliers
Freight costs peaked in the fall of 2022 but remain high
Relationship management: Can help if there are allocations to be made; treat supplies as partners.
Less reliance on just-in-time manufacturing
Industry 4.0 momentum: Interest returning in how to combat labor and supply chain issues: AI, ERP, automation, additive manufacturing, pairing with lean technologies
Data analytics: manufacturers have large amounts of data; need to be able to extract it from systems and analyze it.
Cybersecurity: Has become more important for those operating with smart equipment; connection to the internet exposes them to cyber attack; seeing these issues with small as well as large manufacturers.
Mergers & Acquisitions trends
BDO survey indicates 38 percent of manufacturers will pursue M&A activity in 2023; mostly larger companies.
Impacted by rising interest rates: slowing with higher rates but strongest balance sheets looking at M&A.
Motivated to gain new technology.
Uncertainly in economy is creating forecasting challenges.
Expecting some consolidation in some sectors, like light and equipment manufacturing.