VCC_er2021

While it’s too soon for the final numbers, preliminary March manufacturing and service-sector data indicate that the U.S. Manufacturing Purchasing Managers Index will increase to 49.3, beating the market’s expectations of 47. This modest improvement in production gain for manufacturing is attributed to improving supply chains. After contracting for five consecutive months, global manufacturing stabilized and rose to 50.0 in February, according to the Global Manufacturing Purchasing Managers’ Index.

Turning to production, manufacturing production increased slightly in February by 0.1%, a decline from the 1.3% increase seen in January. Over the past 10 months, manufacturing output has weakened by 2.1% due to continued geopolitical and economic uncertainties.

Despite rising interest rates, a slight uptick in unemployment, and an emerging banking crisis, the economy still added 311,000 jobs in February and remains resilient. Businesses and manufacturers still need workers, as there are 5.1 million more job openings than unemployed workers.

According to the U.S. Department of Labor, the Producer Price Index declined 1% in February. However, producer prices have increased 4.6% for final demand good and services over the last 12 months.

In February, the Consumer Price Index rose by 0.4% and 6% year over year, a decline from a 6.4% increase in January. Excluding food and energy prices, the core CPI rose 0.5% in February and 5.5% over the past 12 months.

With a goal of bringing inflation down to 2%, the Federal Reserve has the unenviable task of choosing between fighting inflation or stabilizing the banking industry. On March 22nd, despite growing concerns from the banking industry, the Federal Reserve chose to further hike interest rates by 0.25 percentage points, the ninth consecutive rate increase since last March, leading to concerns that banks will contract available credit and lending, and, in so doing, slow economic growth.

As we continue to navigate these choppy waters, the Vermont Chamber will continue its work to advance Vermont’s economy and provide you with advocacy, access to resources and supply chain contacts, and the need-to-know information on the state of manufacturing at the local, national, and global level.

Having a vital and thriving manufacturing sector here in Vermont, as well as nationally, is essential to the overall health, growth, and future or our economy. Every $1 spent in manufactured goods generates an estimated $2.68 worth of additional economic activity, the third highest of any other economic sector. Additionally, each manufacturing job supports an five jobs elsewhere, according to the National Association of Manufacturers.

The Vermont Chamber is committed to advancing manufacturing because the significance of this industry is undeniable. We do this work through:

• Legislative advocacy on advancing the economy, workforce, housing, and tax policy focused on growth.
• Trusted member referrals and introductions.
• Adaptive supply chain matchmaking bringing buyers, suppliers, and partners together for contacts, new business opportunities, and contracts.
• Regional and international economic development.

With January’s economic data now in, we have a complicated picture for manufacturing as we head into March and look ahead. Inflation continues to accelerate and remains stubbornly high year-over-year. Both national and worldwide manufacturing activity continue to reflect contraction. Given the heightened geopolitical tensions with China and Russia, a pending debt ceiling crisis, and tight labor and housing markets, manufacturers remain resilient and must continue to navigate an economy that refuses to adhere to past norms.

In January, the Consumer Price Index (CPI) rose 0.5% to 6.4%, down from 6.5% in December, according to the U.S. Bureau of Labor Statistics. The personal consumption expenditure index, the Federal Reserve’s preferred price gauge, jumped 0.6% from December, a 5.4% increase year-over-year. The Producer Price Index (PPI), a measurement of what suppliers charge businesses and other customers, increased 0.7% in January, reversing a 0.2% decline in December, according to the U.S. Department of Labor. Producer prices for energy costs also spiked 5.0% in January.     

Inflation continues to remain high with price changes over the last year increasing for fuel oil (+27.7%), gas utilities (+26.7%), transportation (+14.7%), and electricity (+11/9%). Combined with 517,000 jobs added in January, a decline in jobless claims, a low 3.4% unemployment rate, and undaunted consumer spending, it can be expected that a resilient economy will push the Federal Reserve to further raise interest rates to curb inflation. The possibility of inflation waves, as the country experienced in the 1970s, is not unlikely given January’s data and several inflation drivers, such as the wage price spiral, higher material costs and costs of capital, and rising deglobalization trends. If rates were to head higher, this could tip the economy into recession for a hard landing and put millions of people out of work.     

For the third straight month, national manufacturing activity declined to a post-pandemic low of 47.4 in January from 48.4 in December (anything below the 50 threshold reflects a shrinking economy) according to  the ISM Manufacturing Purchasing Managers’ Index. Manufacturing activity slightly increased from 48.7 to 49.1, according to the J.P. Morgan Global Manufacturing PMI.  

On a positive note, manufacturing production increased by 1.0% in January, representing a very modest 0.3% increase over the past 12 months. According to NAM, durable and nondurable goods output also rose 0.8% and 1.1%, respectively, and manufacturing capacity utilization rebounded from a 15-month low to 77.7% in January from 77.1% in December. Manufacturing employment rose 19,000 in January, with the manufacturing sector now employing 13 million people. Wages increased and average hourly earnings rose to $25.84 in January from $25.64 in December. With twice as many job openings as there are unemployed people, wage growth will continue to be an inflationary driver for the foreseeable future.

In the meantime, manufacturers are seeking creative ways to recruit workforce. According to the Wall Street Journal, “we are seeing a new development as manufacturers turn to former workers and retirees. Both tend to be efficient additions because they often need less training than new hires.” Until reforms are addressed, such as legal migration, we’ll continue to see creative but temporary fixes to deal with an estimated 800,000 job openings in manufacturing and what is ultimately a population challenge and aging demographics in areas of the country. 

Finally, unless Congress and the White House raise the debt ceiling, the federal government could reach its debt in July and default on its debt obligations. The U.S. now has a staggering $31.4 trillion in total debt, which is on track to equal the annual output of the economy by 2024. If a compromise is not reached, both the U.S. and the world could face a financial crisis, a stock market crash, high unemployment, a crisis of confidence in the U.S. dollar as the world’s reserve currency, and a global recession.

While inflation may have softened in December, it remains high as we begin 2023, causing manufacturers to navigate an economy in flux. The industry is facing workforce and housing shortages, persistent inflation, supply chain challenges, increased raw material costs, a looming debt ceiling crisis, geopolitical conflict, and risk of recession.

While inflation fell for the sixth straight month (from 7.1% in November to 6.5% in December, according to the Consumer Price Index), consumer prices only fell 0.1% and inflation remains high. Personal consumption expenditures prices (core prices), excluding food and energy prices, rose 0.3% in December and are up 5.7% on an annual basis, according to the U.S. Chamber of Commerce. A decrease in gas prices of 9.4% could be what caused the drop in inflation in December. We can expect the Federal Reserve to focus on additional interest rate hikes to further cool the resilient economy, but it’s unclear how long this tactic will work.

According to the ISM Manufacturing Purchasing Manager’s Index, manufacturing saw a decrease in activity for the second straight month, dropping from 49% in November to 48.4% in December. Production also saw a decrease for the first time since May 2020, with orders and exports falling to post-pandemic lows.

Unemployment continues to remain low, falling from 3.6% in November to 3.5% in December. Workers continue to feel confident about quitting their jobs, causing businesses and manufacturers to continue to struggle to find workers. Nationally, there are 4.45 million more job openings than job seekers, after 4.2 million workers quit their jobs in November. However, hiring in the manufacturing industry paints a brighter picture, after adding 8,000 jobs in December.

In Vermont, housing presents a challenge for the industry when trying to retain and attract employees, and money alone cannot fix the problem. Breaking down barriers, such as modernizing Act 250 and streamlining both permitting and zoning, is needed to provide housing for the missing middle-income earners.

Looking towards the road ahead, Congress and the White House have five months to raise the debt ceiling on the U.S. Federal debt. Aside from extraordinary measures being taken by the U.S. Treasury Department and debt negotiations, the world could face a financial crisis and a global recession if a deal is not reached. If the U.S. defaults on its debt and becomes insolvent, there will be a crisis of confidence in the U.S. dollar as the world’s reserve currency.

In the meantime, the World Bank lowered its growth forecast for the global economy from a slow of 3% in June to 1.7%, as inflation persists and raises the risk of a worldwide recession. Global inflation is starting to cool but continues to remain historically high.

While the current state of the economy and difficulties facing the industry continue to paint an uncertain picture, there are indicators of a positive trajectory. For example, consumer sentiment continues to remain historically low, but saw an increase for the second consecutive month, rising from 59.7% in December to 64.6% in January. Additionally, year-over-year wholesale prices rose 6.2% in December, down from 7.3% in November, a hopeful sign that pressures on inflation will continue to ease.

Along with the holidays and celebrations, December is a time to reflect and gear up for the new year. As we plan and budget, it’s not only important to look at where we are today, but where we want to be, so we know how to get there. This can be challenging, especially with an economy in flux and at an increased risk of a recession, additional inflationary waves, geopolitical conflict, and slower economic growth. With an eye on the coming year, let’s take a look at the State of Manufacturing and the U.S. Economy.   

According to the ISM Manufacturing Purchasing Managers’ Index, the activity for manufacturing contracted for the first time since May 2020 with the index falling to 49.0 in November. Anything below the 50 threshold reflects a shrinking economy, which translates to contracting new orders, falling exports, and declining employment and slowing production. The one silver lining is improvement in supply chain disruptions and challenges.

While consumer prices did rise, the consumer price index fell to 7.1% in November, the lowest level since the end of last year, according to the U.S. Bureau of Labor Statistics. This is compared to 7.7% in October and a high of 9.1% in June. Given this slowing of inflation, Wall Street correctly anticipated the Federal Reserve slowing the pace of increasing interest rates to rein in inflation and prices with a rise in the benchmark rate by half a percentage point (50 basis points), increasing the rate to 4.50%. It is further expected that the Federal Open Market Committee (FOMC) will continue to hike interest rates to between 5 and 5.25% by the end of next year, and not begin reducing interest rates until 2024. In the meantime, it is important to keep in mind that inflation still remains near 40-year record highs and “the areas that saw the largest 12-month increases, according to the U.S. Chamber of Commerce, included food up 10.6%, energy up 13.1%, and housing up 7%.”

While this slowing trend is moving in the right direction, more work and time is needed to curb high inflation and work out the excess stimulus and liquidity in the system, which, along with surging demand and supply chain and workforce shortages contributed to inflation. It is also worth noting the U.S. experienced waves of inflation in the 1970s and this current moderation or slowing of inflation might be setting the stage for additional inflationary waves. Otavio Costa, Partner and Portfolio Manager at Crescat Capital, views inflation “as a structural problem caused by secular forces, including wage growth, commodity shortages, aggressive fiscal spending, and deglobalization, and that inflation develops through waves, and we have seen the first wave.”

While this time might be different, it may not be and understanding past historical, inflationary trends provides a future potential scenario when planning and when there’s uncertainty.

GlobalFoundries offers both space and an array of amenities for Québec manufacturing companies seeking a U.S. footprint. To capitalize on this market opportunity, the Vermont Chamber, the Vermont Agency of Commerce, GBIC, and CIDEP (Vermont’s foreign trade representative firm in Montréal) are partnering with GlobalFoundries on tenant recruitment efforts to grow Vermont’s $3 billion dollar manufacturing industry. This work supports of the Governor’s economic development priorities to strengthen our ties with Québec and transform Vermont into a Supply Chain Hub. Recruitment of Québec companies in the aerospace and defense sectors also strengthens cross-border commerce and the Vermont Chamber’s work to build the Vermont – Québec Aerospace Trade Corridor.

November follows October, which was celebrated as Manufacturing Month nationwide, and is a time to pivot, get back to business, and navigate the road ahead, which presents a mixed picture.

The Institute for Supply Chain Management’s Manufacturing Purchasing Manager’s Index (PMI), an index that measures U.S. manufacturing activity, fell 0.7 percentage points to 50.2 in October, the lowest level since May 2020, just over the 50 threshold that reflects a shrinking economy. Manufacturing is slowing due to a decline in business spending and demand for consumer goods, according to the National Association of Manufacturers (NAM).

In contrast, the U.S. economy rebounded in the third quarter, expanding 2.6% at the annual rate, due in part to strong consumer spending on services, government, and net exports. According to the Consumer Price Index (CPI), the annual inflation rate also fell 7.7% in October from 8.2% in September. While supplier price and inflation are possibly abating, it is important to remember that rises and falls in inflation have happened before in waves. Real GDP, furthermore, is forecasted to increase 1.8% in 2022 with only 0.7% growth in 2023, elevating the risk of recession.

On the upside for manufacturing, supply chain bottlenecks continue to improve with supplier delivery times, manufacturing production expanded by 0.4% in September (4.7% year-over-year), employment increased by 32,000 in October (up from 23,000 in September), and output in the third quarter increased by 1.4%, demonstrating manufacturing resilience to the many challenges from soaring costs and workforce labor shortages to economic uncertainties.

October is Manufacturing Month nationwide and is celebrated in Vermont with events and onsite tours of plants and facilities. It is essential to showcase Vermont’s $3 billion industry as an important economic driver that employs more than 28,000 Vermonters (10% of Vermont’s workforce) and contributes 9% to Vermont’s Gross Domestic Product.

Manufacturing contributes to the greater economy via the:  

• Economic Multiplier Impact: Every $1 in manufactured goods generates an estimated $2.79 worth of additional economic activity, the highest of any other economic sector. If the entire manufacturing supply chain is included, every $1 spent in manufacturing adds another $3.60 worth of additional economic activity.
• Employment Multiplier Impact: Each manufacturing job supports an additional 5 jobs elsewhere.

Nationally, September saw an increase in manufacturing activity from August, but saw a decline in the index, from 52.8% to 50.9%, according to the Institute for Supply Management (ISM). Overall, the data is mixed with new orders contracted, production and inventories increasing, and prices slowing, as reported on the Q3 Manufacturers’ Outlook Survey done by National Association of Manufacturers (NAM).

While the economy added 263,000 jobs in September and the unemployment rate fell to 3.5%, the second quarter saw U.S. economy shrink by 0.6% and the real GDP decline by 8.5% in the manufacturing sector. Manufacturing job openings fell in August from 910,000 to 795,000, according to the Job Openings and Labor Turnover Survey. However, manufacturing job openings remained high overall, as demand for goods increased the need for employees during a severe workforce labor shortage. Manufacturers hired an increase of 24,000 workers for a total of 452,000, up from 428,000 in July, according to NAM.

Inflation accelerated in September, with the Consumer Price Index (CPI) rising 0.4%, for a total of 8.2% over the past 12 months. Looking ahead to the remainder of Q4 manufacturers can expect additional higher interest rate hikes, supply chain disruptions, and worker shortages. All of this will compound, leading to recession worries in 2022 or 2023.

These pressures and workforce challenges will persist into Q4 and beyond, but manufacturing has proved resilient. According to NAM, the manufacturing value-added output increased to an all-time high of $2.768 trillion in Q2, while the industry accounted for 11% of manufacturing value-added output.