Manufacturing Outlook—Labor, Supply Chain & Inflation Hurdles
Ian Alberts, CPA
9.14.22 | Industry Insights
Like many other industries, the manufacturing sector must face a number of hurdles on the road ahead. Inflation, recession jitters, an uncertain supply chain, labor concerns, and raw material price fluctuations make for a slew of issues that must be faced and overcome. Here are some of the key concerns.
The Withering Inflation/Recession Fears Headwind
While many expected inflation to ease a bit over the Summer, August metrics prove otherwise as recent reports show the consumer price index rose 8.3%1 last month, which will prompt the Federal Reserve to continue to wield its most potent weapon — the ability to hike up interest rates — in an effort to cool the economy and slow inflation.2 In doing so, the Fed is attempting to delicately balance fighting inflation while not triggering a recession. Nevertheless, higher interest rates are on the horizon and will certainly make borrowing more expensive, which will impact future purchasing decisions. With rising inflation, the current economic conditions present numerous business challenges to manufacturing companies, including the increase in raw material prices, freight and transportation costs, wages and salaries, energy costs and the shortage of workers3, so it may be a bumpy road ahead for the industry.
Raw Materials and Supply Chain Steadied … But
On the positive side of the ledger, manufacturers have seen the price of lumber — which had been on a wild ride — fall back to earth since the beginning of the year.4 However, there are still concerns about the fragile supply chain, which may be subject to further interruptions. The unpredictable outcome of the ongoing war in Ukraine also adds an element of uncertainty. With overseas resources still in question, reshoring is being viewed as a more feasible alternative that could evolve beyond just being a response to the current crisis and become the more conventional way of doing business. Many manufacturers are also exploring various “value engineering” projects – finding new and different materials for their projects.
Personal Consumption Expenditures Trend Up … However
The PCE (Personal Consumption Expenditures) price index hit a 41-year high in June.5 While it is clear that U.S. consumers are still spending, they are spending just to keep up with inflation. With inflation factored in, consumer spending only rose by 0.1%. More alarming, disposable incomes actually fell by 0.3% month over month. These factors give rise to fears that consumer spending, which had been bolstered by earlier government infusions of money which have ended, will slow down, accompanied by a reduction in overall demand for goods. There are already signs of a supply surplus with pressure to reduce prices in order to move the merchandise. With the fear of a decrease in consumer spending, manufacturers may see less demand for their products, further increasing the challenges caused by inflation.
Labor Market is Strong … For the Moment
Massive unfilled job openings and an overall labor shortage have impacted hiring and retention. To bring in applicants and encourage employees to remain, companies are considering:
- Increased financial incentives,
- Signing bonuses,
- Attendance bonuses,
- Flex scheduling, and
- A permanent hybrid work environment (where applicable)
Should the nation slip into a recession, the labor market may eventually soften. There are some early indications, including recent corporate layoffs and an uptick in unemployment benefits filings.6 This trend will be carefully watched as the year progresses, but due to supply chain issues, there is a backlog of work to be completed which has kept the manufacturing job market steady for the time being.7
Building in Unpredictability
Many companies are purchasing commodities and stock in large quantities to secure the current price of the item out of fear of another supply chain issue, which allows manufacturers to produce more of a product and sell it successfully. Some are also willing to pay more upfront to make sure the products are delivered on time and when needed. This allows for manufacturers to charge more as these manufacturing setbacks have delayed projects, in turn making the project more expensive. Others are taking a wait and see attitude but at the risk of missing opportunities. There is a major emphasis on tracking where and when to purchase goods at the most favorable prices and from favorable locations. With uncertainties abounding overseas, companies are looking at sourcing within the U.S., making domestic manufacturers more attractive to buyers.
Cyberattack – Defense and Recovery
While many manufacturers take pains to build their cyber defenses, the fact is that even the strongest defense can be breached. Cyberattack recovery should be given equal attention. A successful attack can knock out operations for an extended period—impacting contractual obligations in addition to the obvious financial and reputational losses experienced by an attack. In addition to having a robust cyber defense and recovery plan, it is also prudent to ensure that key suppliers have adequate plans and have a list of alternate suppliers should any issues arise.
As these factors attest, the road ahead will have its bumps and those best prepared will emerge the strongest.
Berdon LLP New York Accountants