6 Manufacturing Insights from Q1 2023 and What They Mean for You

A slower growing economy and excess inventories have resulted in the manufacturing sector surveys signaling a contraction for consecutive months, the first time since the COVID-19 pandemic. Coupled with rising interest rates, corporate deal makers are now uncertain what lies ahead and have reduced 2022 M&A activity. The silver lining is that slower economic growth and rising interest rates have reduced inflationary pressures as input prices and shipping costs have declined considerably. Thanks to the Infrastructure Investment and Jobs Act that was passed in 2021 and the Inflation Reduction Act of 2022, 2023 is also set to have a wave of new government contracts up for bid.

1. The Manufacturing Sector Enters its First Contraction Since May of 2020.

According to ISM surveys of manufacturing firms, the sector has entered a contraction (below 50) for consecutive months, the first time that has occurred since May of 2020. Notably slowdowns in new orders (a leading indicator), supplier deliveries, and supply chain delays have weakened the industry.

What this means for you: Expect lower demand as the economy slows. Consider scaling back production to faster moving SKUs, concentrate on cash conversion cycles through inventory management and more active accounts receivable management. Consider expanding sourcing options or reduce vendors to hit volume discounts to reduce expenses to offset lower demand.

2. Input Prices Show Continued Inflationary Relief but also Weakening Demand.

Input prices have declined from their three-year highs as rising interest rates curb demand and slow the economy. Furthermore, from the latest ISM survey of over 300 manufacturers, only 13% of them reported paying higher prices for raw materials.

What this means for you: While lower input costs alleviate some inflationary pressures, it also indicates a slowing economy. Consider opportunities to leverage spot rates of raw materials to achieve better pricing from your suppliers and potentially reduce your costs.

3. Industrial M&A Activity Dropped in 2022 Due to Uncertainty.

Rising interest rates and fears of a recession have pressured M&A activity as corporate dealmakers remain cautious. In contrast, 2021’s volume was the highest since 2003, aided by pent-up demand, cheap financing, and large cash reserves. However, higher financing costs and declining demand ultimately caused volume to decrease in 2022.

What this means for you: Higher interest rates and weaker demand trend is expected to continue in the near term. If considering a transaction, aggressively managing costs to protect margins, and maintaining a healthy balance sheet by paying down debt should enhance exit opportunities arise when the economy turns around.

4. Demand for Warehouse and Factory Jobs are Coming Off Peak Interest.

According to Google Trends data, interest in “warehouse jobs” and “factory jobs,” while remaining historically high, declined in the second half of 2022. Though a seasonal reduction in job searches over the holidays may explain part of the decline, there appears to be a regression in manufacturing job searches.

What this means for you: Lower interest in manufacturing jobs implies that the labor market may become tighter as workers become scarcer. While the demand for additional labor may not be needed as the economy slows down, consider strategic hires ahead of an eventual economic rebound and optimize your existing human capital by retaining valuable employees with competitive pay and benefits.

5. Infrastructure Spending Set to Ramp Up in 2023.

The Infrastructure Investment and Jobs Act (IIJA) is set to bring on a wave of public sector investments that may mitigate slowing economic growth and provide support to the manufacturing sector. To realize the full benefits, the manufacturing and distribution industries will have to address any remaining kinks in the supply chain. 

What this means for you: Consider allocating resources, acquiring talent, and engaging experts in government contracting that can help win government fiscal stimulus opportunities given the expected economic weakness in the private sector.

6. Contractual Truckload Rates Show Signs of Relief.

Truckload spot rates have declined considerably after the post-Covid surge. As spot rates lead contracted rates, plan for contracted rates to decline when time for renewal.  

What this means for you: With contracted rates, consider proactively approaching your brokers or carriers about negotiating a rate closer to the current spot in exchange for not putting the business out to other providers.

Disclosures

Investment advisory services are offered by Aprio Wealth Management, LLC, a Securities and Exchange Commission Registered Investment Advisor.  Opinions expressed are as of the current date (October 30, 2022) and subject to change without notice. Aprio Wealth Management, LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. This commentary is for informational purposes only and has not been tailored to suit any individual. References to specific securities or investment options should not be considered an offer to purchase or sell that specific investment. 

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