The Economy Keeps Plugging Along
Wondering what the state of the U.S. economy is? We’ve got an answer – it’s OK. Not great, not in dire straits. So, let’s take a look at how the economy is impacting manufacturing.
A look at the economy
First off, let’s look at some of the factors impacting the economy and your business. First up, demand. Demand for durable goods drives demand for what you manufacturer, so one could argue that demand needs to be trending up to drive substantial new spending. But while demand is higher than was forecasted in 2021, inflation has had a significant impact, which is a high-level explanation of the slowness you and/or your customers may be experiencing.
In addition to inflation, interest rates are another economic “lever.” It’s no secret that interest rates are high. We’ve seen the fastest rate hikes since the 80s, but there is a slowdown in sight. This doesn’t mean the rates will be lowered, but we are seeing a plateau due to:
Rising yields
Falling inflation
Ending of student loan deferment
A third economic factor is employment. Generally, when interest rates rise and inflation falls, unemployment rises, but we aren’t seeing that. In fact, unemployment has stayed at record low rates for most of the last 20 years. Why? The massive demand during COVID and the challenging labor market with lower labor participation. In manufacturing, companies are keeping skilled laborers, even fighting for and/or stealing them from one another.
What it all means
What does this mean for manufacturers? It’s not just the economy alone, it’s the health of your business. We look at balance sheet health and classify a business into one of three categories: bankable (strong), somewhat bankable, questionably bankable (weak). Unfortunately, from 2021-2022, we saw a significant shift of manufacturers in the questionably bankable category, from 19% to 29%.
Profits, specifically earnings before interest and tax (EBIT), are flat or down across all types of manufacturing.
As you can see, even top performers are now below double-digit profits. But while some shops are doing extremely well, on average, things are trending down due to an increase in wages, material costs and inflationary costs.
Employment is another key factor in flat or decreased EBIT, as well as revenue and profits. In a 2023 Harbour Results, Inc. study of 400-500 small- and medium-sized manufacturers, approximately 50% expected revenue to be flat or down, with a similar amount expecting the same for profit, and 90% of those manufacturers indicated they planned to hire or maintain existing headcount levels.
It's understandable to hold on to skilled laborers because it’s hard to find and keep them, but with uncertainty being the new norm for manufacturers and financial performance trending down, it’s hard to not question the hiring trend.
Where to go from here
It’s a lot of information, but it can be used to help you plan where to take your business. Looking at various industries that drive demand for goods, most are expected to be stable, but flat, with not a lot of growth in compound annual growth rates. The medical industry will likely see stronger demand due to an increased aging population in the next 30 years. Another area likely to see increased demand is road construction, building materials and railways/trains due to infrastructure spending, specifically in the U.S. Department of Transportation.
In the end, uncertainty is going to be the norm for manufacturers. You need to hunker down and figure out how to de-risk your business for the future.
Finally, you need to arm yourself with data that can help you make better, more informed decisions. Currently, the PMA Metalforming Insight powered by Harbour Results is conducting its annual benchmarking survey. We encourage all metal formers to participate in the survey to receive the comprehensive study output. If you have not received information on how to participate, please contact Cindy Minn. The deadline for submission on May 31, 2024.
