Economic Outlook Manufacturing 2023

by Leslie MacAskill

As 2022 calendars run out of pages, U.S. manufacturers, suppliers, and others intently focus on the outlook for 2023. The Institute for Supply Management’s November report shows that new orders are contracting even as prices drop and raw material inventories grow. U.S. manufacturing activity slipped in November for the first time in 2.5 years, and the production index also registered a slight decrease. However, six industries reported growth, compared to twelve that contracted. The winners include:

• Apparel, leather, and allied products

• Nonmetallic mineral products

• Primary metals

• Miscellaneous Manufacturing

• Petroleum and coal

• Transportation equipment

Why is the health of U.S. manufacturing so important?

Manufacturing in the U.S. contributes over $2.3 trillion in GDP and employs more than 12 million workers. In addition, manufacturing companies account for 70 percent of the spending on business-related research and development and provide 60 percent of U.S. exports. While the overall manufacturing sector has been soft for some time compared to the broader economy, experts at consultant McKinsey believe that opportunities for growth and advancement are both ample and critical to be implemented. The McKinsey analysis indicates that strengthening manufacturing overall could improve the earnings prospects for millions of middle-skill workers while reducing the U.S. trade deficit.

What is the outlook for U.S. manufacturers heading into 2023?

How can we analyze the impact of diverse variables like rising interest rates, supply chain hiccups, and customer fears to assess the overall potential for manufacturing in the new year?

Consider the forecast from the International Monetary Fund, which anticipates minimal worldwide economic growth in 2023 of 2.7 percent. On a regional basis, the IMF expects economic activity to decelerate in the Western Hemisphere throughout 2023. However, this news is somewhat tempered by the expectation that monetary policy will succeed in slowing inflation. Similarly, consultant Deloitte forecasts limited growth for overall U.S. manufacturing activity in 2023.

To examine the underlying causes in more detail, we can focus on some contributing factors for closer attention:

Interest rates

According to Mark Zandi with Moody’s Analytics, the consecutive interest rate hikes are now hitting manufacturing after first slowing construction activity. Zandi notes: “Up until now, the manufacturing base has had a number of tailwinds. Now, all those tailwinds will soon start to turn into headwinds. Manufacturing is kind of treading water at this point, losing steam, and will be in recession shortly.”

Combined with the rise of the U.S. dollar, which makes exports less competitive, manufacturers are wisely concerned about the orders for next year. The Federal Reserve aims to slow growth, hopefully without tipping the economy or any sectors into recession. Moreover, slower growth should ease the runaway inflation of the last year by curbing demand for goods.

The trick for the Federal Reserve is finding that sweet spot, and whether they can reach equilibrium next year remains to be seen. However, Forbes contributor Bill Conerly suggests that they have already overshot the mark, triggering a slowdown that could veer into recession unless they change course.

But inflation is no panacea, particularly when it affects the housing market. Whether potential buyers are scared off by high-interest rates or rising prices for homes, a soft housing market can drag down the entire economy, including manufacturing. Michael Hicks, director of the Center for Business and Economic Research at Ball State University, notes that rising interest rates reduce demand and increase operational expenses. “Just as we think we were coming out of the supply chain problems, interest rates start rising,” Hicks said. He notes that even if the Fed can hit the target of a “softish” landing with marginal economic growth, manufacturing and housing will likely be sluggish. Hicks concludes that neither consumers nor producers should have high hopes going into 2023.

Interest rate increases can also disrupt inventory management, which is already hampered by supply chain disruptions. Daniel Son, head of Global Banking at U.S. Bank, points out that when interest rates rise, companies reduce inventory to avoid increasing carrying costs for the stock they haven’t sold. This reaction can stall efforts to resolve supply issues.

Supply chain disruption.

Forbes Magazine manufacturing guru Dave Evans recently noted that supply chain disruptions preceded the COVID-19 pandemic and have since been exacerbated by other local and world events. Therefore, it would be foolhardy to think that easing the pandemic will end the disruptions. Instead, Evans suggests that manufacturers should incorporate the potential for disruption into their planning, developing a more agile supply chain. He notes that companies that can create a flexible chain that includes supplier diversification and strategic contingency planning will enjoy a competitive advantage over their rivals.

One potential impact of this focus is fueling the trend toward outsourced manufacturing by U.S. companies. The 2022 State of Manufacturing Report (from analyst Fictiv) noted that almost half of respondents reported increasing their outsourcing in 2022, while three-quarters of those surveyed cite the benefits of quality, speed, efficiency, and pricing as reasons to consider the option.

The National Association of Manufacturers states that supply chain disruptions will continue through 2023, citing continued pandemic lockdowns, blocked shipping lanes, container scarcity, military conflicts (like Ukraine), widespread weather issues, and material shortages. However, NAM points out that organizations are looking for ways to reduce interruptions by expanding their sources and reducing the complexity of their networks. Adding to the concern about contingency planning and resilience, NAM reports that 73 percent of manufacturing companies that responded to their questions expressed concern about the overall stability of their supply chains.

The NAM review cited planned improvements to the digitization of supply chains as the most common plan for remediation. However, manufacturers are facing some challenges in adopting digital technology, including:

•
Lack of ability in partner
organizations

• Mismatched data platforms

• Need for upgraded equipment

• Lack of employee skills

As manufacturers continue to seek improvements in the supply chain, two standard approaches being adopted are the development of local capacity and a shift from “just-in-time” inventory to redundant sourcing.

Ukraine war

As some manufacturing sectors started to recover from the supply concerns caused by covid, many took an unexpected hit from the Russian attack on Ukraine, which has degraded the global supply of steel and commodities used in the critical production of semiconductors and other products. Furthermore, the sanctions levied against Russia and the resulting decrease in the ruble’s value have hindered Russia’s ability to buy at its typical levels. While Russia usually is a net exporter of commodities, it is a net importer of manufactured items and components. New car imports to Russia, in addition to automobile assembly parts, are dropping. Ukraine is a much smaller market but is a customer of U.S. transportation equipment, machinery, and mechanical appliances.

Is there any solution?

Deloitte suggests that successful manufacturers in 2023 will enact some changes to assure their continued viability. The consultant applauds the digitization trend and recommends investing in other advanced manufacturing technologies. Also, Deloitte notes that despite aggressive hiring over the past year, manufacturing companies still have record-high openings. To compete, companies will need to refine their recruitment and retention strategies.

Forbes, which highlighted the move toward digital transformation, suggests that it’s vital for manufacturers to pursue not only the digitization of their supply chain but other technologies that will provide a competitive edge. These advances include artificial intelligence, virtual and augmented reality, blockchain, and faster network computing capabilities. Technology can not only improve manufacturing processes, but it’s also necessary for customer service, product enhancements, and marketing.

One example is the emerging IIOT (Industrial Internet of Things) which features interconnected devices used to collect data throughout the manufacturing process. These high-tech sensors help manufacturers optimize performance, reduce interruptions, and predict when things will go awry.

McKinsey reports that adopters of digital technology overall are enjoying improvements in sustainability, productivity, agility, and speed-to-market.

In any economic cycle, there are winners and losers. In 2023, those who want to win need to be more technologically savvy than their competitors and be bold about incorporating modernization into their processes.

About the Author

Leslie MacAskill is a Harvard-educated professional with over 30 years of experience writing and editing in diverse business and political environments.