If you’re eying your business prospects warily, you’re not alone. Executives in manufacturing and distribution are preparing for a potential economic recession, and according to a report from Sikich LLP, their optimism about the future reached an all-time low in the fourth quarter of 2022.
The Sikich Industry Pulse, a report which surveys manufacturing and distribution executives nationwide and across sectors multiple times per year, highlights top industry trends as they arise. The latest report surveyed more than 120 executives, a majority of whom (51%) indicated their optimism about business prospects over the next six months to be at a six or lower on a scale of one to 10.
The primary factor driving down optimism across survey respondents is the prospect of an economic recession. To prepare for this looming possibility, executives are employing a range of tactics—though few plan to touch wages. Instead, they plan to increase the top line while cutting costs in other ways.
Only 49% of manufacturers rated their near-term optimism as seven or higher, marking a consistent trend downward over the past year. In comparison, in March 2022, 70% of manufacturers rated their optimism at a seven or higher—in line with previous year’s ratings that steadily hovered around 75%. By June 2022, optimism began to decrease; 58% rated their optimism at a seven or higher.
The top factors for executives’ decreased optimism are the potential for an economic recession (cited by 77% of survey respondents), increasing interest rates (62%) and continued supply chain issues (53%).
Beyond the impact an economic recession brings to manufacturers’ business profitability, increasing interest rates also dampen manufacturer optimism. Companies may have debt or lines of credit that exist with variable interest rates. The continuing rise in interest rates will result in spending cash that manufacturers did not intend to lose to interest. Further, this extra expenditure stifles their desire to buy new equipment, knowing that it’ll cost more with the increased interest.
The supply chain issues created by the COVID-19 pandemic are starting to feel like a challenging “new normal.” Companies in the United States can get ahead of the next supply chain crisis by diversifying suppliers, including bringing some closer to home. Relying on materials made nearby, in Mexico, for example, sets up a U.S. business with greater access than if the parts supplier resides overseas.
Recession fears are top-of-mind for manufacturers, according to the survey. As a result, they’re planning for a range of cost-containing strategies. More than half of survey respondents (51%) plan to keep less inventory on hand, 39% are diversifying their materials suppliers, and 34% are considering a hiring freeze. Notably, only 1% of respondents have decided to freeze wages.
Executives are prioritizing a reduction of inventory. They must convert their products into cash that could bolster their position in a recession. When the supply chain disintegrated early in the pandemic, customers bought whatever they could get their hands on, driven by a fear of not being able to get it later. An economic squeeze would see manufacturing pipelines narrow, with fewer customers ready and willing to purchase at the end of it. Moving inventory now can provide a cushion against recessionary conditions in the near future.
In a similar vein, manufacturers indicate they will diversify their materials suppliers to prepare their business for recession. This reduces the risk of depending on a single supplier. We’ve seen that if that one supplier goes offline, the ripples down the supply chain can build to a storm that significantly disrupts the business. Spreading parts production among suppliers, especially those closer to home, can streamline and protect a manufacturer’s supply chain.
Hiring freezes are another top consideration for containing costs in the face of a recessionary environment. Manufacturers ought to tread lightly in this area, as missing the opportunity to hire someone with valuable skillsets—especially someone who would be hard to find in the future—can negatively impact their growth potential. Notably, 46% of smaller manufacturers (companies with less than $50 million in revenue) described labor shortages as a challenge—another reason not to pass on a potential great hire. Manufacturers would further benefit from engaging existing employees to their fullest potential. This may look like exploring factory floor automation options, which can free up workers to contribute in other impactful ways.
Manufacturers face obstacles from many directions today. But there are reasons to remain optimistic. A focus on long-term strategies, including automation and talent acquisition and retention, will be paramount to success. In the end, it’s a resilient industry and I am confident that business leaders can successfully navigate these challenges.
Connect With Us
