Manufacturing

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.