How Does the Economy Impact Manufacturing?

The economy has a distinct impact on manufacturing. Although U.S. manufacturing has gone sharply down since China entered the World Trade Organization as manufacturing was offshored for lower wages, less regulations, and fewer hurdles, there remains a base crux of manufacturing might. For this base and the trillions of dollars of investments announced, there are three economic levers that will impact the manufacturing renaissance.

We see it as a 3-leg stool. First, taxes must be competitive globally to attract manufacturers. Combining into this first leg is overall costs. In essence, the costs to doing business must be competitive. Second, business stability must be robust. Recently, tariffs have upset the apple cart and brought instability into the mix temporarily, causing worries of inflation, thereby impacting costs. Third, the ability to invest and raise capital is essential. High interest rates have dampened demand as companies have to add significantly higher interest rate costs into the mix and have less capital available to invest.

A Manufacturing Renaissance Is Coming Down the Pike

We see a manufacturing renaissance coming down the pike. Going back to the 3-leg stool, the positive signs are stacking up:

• Tax rates/ costs: Since the tax law was passed, the corporate tax rate was solidified at a competitive rate. If it wasn’t passed, the rate would have gone up dramatically at the end of the year. In addition, the tax act included several benefits for manufacturers to support growth. From a cost perspective, there has been an intense focus on reducing the cost of energy which is a significant component of cost for most manufacturers. Additionally, there are efforts to dramatically reduce regulations, significantly lowering the cost of production. Thus, costs are trending in the right direction.
• Business stability/ tariffs: When tariffs were first introduced, most business executives were concerned about significant disruption and instability as manufacturers are dependent on the global supply chain. Although there were concerns about cost increases due to inflation, they did not come to fruition across the board. Depending on your products, industry, and end-to-end supply chain, you could have been impacted greatly; however, successful companies are utilizing proactive strategies such as SIOP (Sales Inventory Operations Planning) to build resiliency and proactively evolve their manufacturing operations and extended supply chains. Deal frameworks were formed that will drive manufacturing growth, and tariffs have stabilized. Proactive companies are planning their supply chains for the future.
• Access to capital/ interest rates: This has been an issue for the last few years and is a large cause of the manufacturing recession that has largely been in effect for 1.5 years. The main impact on our clients has been from the customer point-of-view as customers postpone orders, spread them out (as financing large purchases is counter productive), and backlogs have dampened. For consumer related products, interest rates plague consumption. Interest rates are finally moving in the right direction and are expected to decline over the next several months.

Thus, manufacturing’s future is bright. As there three key drivers come to fruition, manufacturing will accelerate. It will also be spurred on with $5-10 trillion dollars of investment into manufacturing and building as data centers are built to support artificial intelligence, ships are built to turn around the shipbuilding and logistics sector, the defense industry scales up, and pharmaceutical and medical products are reshored. Proactive companies are scaling up and rolling out advanced processes and technologies to take advantage of the opportunities to come.

If you are interested in reading more on this topic:
Sales Is On the Upswing: Is Your Supply Chain Prepared for Growth