US manufacturers have a weather eye on the economy. And regardless of the back-and-forth of political punditry, there are undeniably dark clouds on the horizon. It is vital to sustained viability and success in manufacturing that leaders properly read the forecast and understand what it takes to come out on top.
While nothing is certain in economics, there are certain cues we can pick up on and common-sense precautions we can take. Manufacturing in a recession is typically a lean period exacerbated by the largesse of the boom that invariably preceded it. Yet this is not to say that scared overreactions win the day. Strategic investments made in the early days of a recession often determine the winners.
If and when a recession strikes may be uncertain. But prospects for manufacturers in a recession comes down to acumen and circumstance. There are certain things going for US manufacturers right now, yet there are also challenges that must be overcome. Below, we will discuss the likelihood of a recession and identify key challenges and opportunities for businesses to maximize success while manufacturing in a recession.
The question of whether a recession is coming is of course complicated. Technically speaking, the US economy entered a recession this summer. A recession is typically defined as two consecutive quarters of negative growth in GDP. But a strong labor market and high corporate earnings have concealed this fact.
An alternative definition offered by the National Bureau of Economic Research or NBER states that a recession is when the economy experiences a significant decline in economy activity over a sustained period of more than a few months. That has not yet occurred.
Yet the prospects for entering a recession by all accounts is a strong one. By some statistical models, the chances of a sustained slowdown occurring by late next year are around 100%. Between the ongoing war in Ukraine, historic inflation, and aggressive interest rate hikes, short-term prospects for manufacturing in the US aren’t good.
Forbes offers the following signals:
Possibly the strongest challenge to US manufacturers is current inflation rates, which are the highest since 1980. Manufacturing in inflationary times is difficult as access to capital is limited and the cost of borrowing prohibitive. It disrupts the supply chain and drives prices up.
In modern times, governments have been tempted to respond to most crises by increasing the money supply, which in turn drives the devaluing of goods and services. As such, inflation acts as a counterforce to growth and profit, reducing the value of the goods manufactured before they’ve gone to market.
Yet successful manufacturing in a recession is possible, and inflation can be countered strategically:
Industrial manufacturing is always hit hard and early in an economic downturn. But it is also quick to bounce back. The opportunity here for US manufacturers is to invest in resilience right now. This is primarily achieved by cash liquidity and targeted capital investment.
Direct cashflow modeling combined with closely managing debt can create a situation in which a period of low profitability gives way to a strong and rapid recovery period following the recession. Likewise, scaling up targeted investments in assets, rather than scaling back, is actually shown to dramatically increase the chances of high revenue recovery. Investments should be made into digitalization, automation, and lean manufacturing.
According to Forbes, the following five trends can increase the chances for successful manufacturing in a recession and boost your manufacturing outlook in the near future:
In spite of supply-chain disruptions, debilitating inflation, ever-rising interest rates, and geopolitical uncertainty, US producers can rise to the challenge. The coming year will likely see a downturn, but it’s important to remember that manufacturing in a recession is a pivotal moment. Trying times have a way of sorting out the leaders from the followers. Prospects for future success depend on smart leadership now.
