Manufacturing Is Starting to Rebound
Although it starts with a depressing state of affairs for manufacturers, there is vast opportunity on the horizon. Manufacturers have been in a recession according to the PMI (Purchasing Managers Index) index almost 100% consistently for over a year and a half. Thus, customer demands have been depressed, pushed out and slashed. If we rewind to the pandemic, consumers went crazy buying products since everyone was stuck at home. Thus, once it opened up and the government flooded the economy with money, consumers flipped and rushed out to buy services and suddenly stopped buying products. It especially hit industries that flourish in the U.S. such as building and construction products, aerospace & defense (as Boeing ran into all sorts of quality issues and was required to curtail production until resolved), etc. Prices shot up as money flooded the system, thereby causing interest rates to spike and inflation to soar. This impacted additional sectors such as industrial equipment and other large ticket purchases.
More recently, the picture has turned positive. For several reasons ranging from geopolitical risks to the tariffs and trade deals to the acceleration of artificial intelligence and data centers, investments in manufacturing, mining and construction have been pouring into the United States. These investments take time to take effect; however, they will stimulate growth. According to the National Association of Manufacturers (NAM), for every $1 invested in manufacturing, $2.67 is added to the economy. Depending on whether you count countries, companies, expansions, etc., the estimates run between $7 trillion to $17 trillion. No matter which estimate is accurate, during the four years prior, only $1 trillion came in combined and so these huge investments will make a difference. In addition, the three pillars for economic success are moving in a positive direction.
The Three Pillars for Economic Success
The three pillars for economic success are moving in a positive direction and gaining momentum.
- Tax & cost competitiveness: The tax cuts for corporations and small businesses were extended and made permanent which will allow the U.S. to remain competitive with the rest of the world. If that hadn’t happened, companies would move to low tax countries. This tax act also provides several benefits for manufacturers to encourage investment. From a cost point-of-view, there has been substantial progress in bringing the cost of energy down dramatically which impacts every manufacturer with the cost of electricity, the cost of raw materials (as energy powers manufacturing), the cost of transportation, etc. It takes time but the cost decreases will make their way through the layers of manufacturing. Deregulation has also been a priority. For every new regulation, the government set a goal to reduce 10 regulations, thereby reducing the cost of manufacturing and logistics substantially. Of course, last but not least is artificial intelligence and advanced technologies. The more that is automated and digitized, the more productive companies will be. On the other hand, the cost of housing remains stubbornly high especially for younger people as supply has not increased. Thus, demand is high and prices remain high with low levels of supply. SIOP (Sales Inventory Operations Planning) addresses the alignment of demand and supply for businesses. The same must occur with housing, and so programs are being considered to stimulate supply.
- Business stability: Tariffs sent the business community into chaos as executives worried about impacts and held off with investment and hiring decisions until they could gain business clarity. Although not every tariff is clear, proactive executives have enough information to make souring and investment decisions. Major trade deals have been formed with the Europe, Japan, the U.K., South Korea, several Latin America countries, etc. In addition, the trade deals have been favorable and stimulated additional investments and expanded access to international markets. Mexico and Canada are largely covered under USMCA, and so the bulk is known. China has a preliminary agreement with the U.S. as well which provides some stability to address inflation concerns. Tariffs are a one-time price increase, but not inflationary. With that said, if there are several months with different products increasing in price, it becomes mildly inflationary overall. The latest consumer price index showed that produced products were stable and not inflationary; instead, services were inflationary. Thus, although services impact consumer confidence negatively, they won’t impact the price of products. To add into the mix there are offsetting price decreases related to energy, deregulations, and other categories of products. Overall, the picture is trending positive.
- Interest rates: The other category that has greatly impacted clients is the cost of capital. Since money flooded the system following the pandemic, interest rates increased to a high of around 9% with many items getting as high as 25% or 100% to try to dampen demand and take money out of the system. Unfortunately, especially for large purchase items such as industrial equipment, backlogs have shrunk substantially. Companies do not want to pay high interest rates and especially for high ticket items. This third variable remains an issue but it is starting to go in the right direction. The Federal Reserve has made two small rate cuts and rates are starting to come down. Yet they remain dramatically higher than the “free money” type rates that existed before the pandemic. Those rates are not going to return as it doesn’t make business sense. Thus, ensure your product and business plans can support a more reasonable yet higher rate than existed pre-pandemic. Clients and contacts are starting to see light at the end of the tunnel. Smaller customers are starting to quote and initiate orders, and smaller orders in general are also starting to come through. It is gaining positive momentum. On the other hand, this provides a one two punch to young homebuyers as high interest rates makes houses unaffordable. That demand-supply situation must be resolved.
What Does This Mean?
Get ready and prepare for success as opportunities will abound. In some industries, it will come in the form of quotes and orders. In other industries, it will come in the form of M&A opportunities and /or the opportunity to buy close-out products at a steep discount. In other industries tied to the manufacturing, mining, shipbuilding, and construction boom, be ready to scale. Roll out a SIOP program to stay ahead of changing conditions and to be alerted ahead of time of opportunities coming down the pike. To learn more about rolling out SIOP, download our complimentary eBook, SIOP: Creating Predictable Revenue and EBITDA Growth.
How can you prepare to scale while remaining profitable? Build resilience and agility into your end-to-end supply chain. Assess your supply chain network, find new collaboration partners to shore up critical links in your supply chain, upskill talent, and automate and digitize your supply chain. Our best clients are constantly looking for ways to better utilize their ERP system, automate manual processes to build scalability and repeatability, and leverage AI and advanced technologies to provide superior customer value and increase profitability. To learn more about how to use AI and advanced technologies for manufacturing success, download our eBook, AI & Advanced Technologies: How AI Powers Smart Supply Chains and Smarter Decisions.
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