Economic contraction began toward the end of 2022, but improvement may occur later in 2023
For much of 2022, manufacturing maintained economic expansion. Still, there were indications of a slowdown. By November, according to one economic indicator, manufacturing had entered a contraction phase.
The Institute for Supply Management’s (ISM’s) manufacturing index, known as the PMI, fell into negative territory for the last two months of 2022. An index reading below 50 percent indicates economic contraction while a PMI above 50 percent signals expansion. The PMI registered 49 percent in November, snapping a streak of 29 months in positive territory, then dropped to 48.4 percent in December.
“We’re definitely going to be in contraction but at a relatively weak rate” during the first half of 2023, Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said on a December conference call.
“This is a very unclear period,” Fiore added. “It’s been very hard to figure out.”Indeed, as part of a forecast issued in mid-December, ISM indicated economic improvement may take place as soon as the second half of 2023. The Tempe, Ariz.-based organization said a survey of executives in 18 industries expect a 5.5 percent net increase in overall revenue this year, compared with a 9.3 percent increase in 2022.
Fifteen industries expect revenue improvement, including:
“The first half of 2023 will be pretty sluggish,” Fiore warned. However, ISM expects a rebound in the second half of the year. The group’s New Orders Index registered at 45.2 percent in December, down from 47.2 percent in November. It was the fourth straight monthly decline in new orders, with only three of 18 industries reporting a gain in December.
This year may represent a mixed bag for manufacturers with a small economic downturn in the first part of 2023, agreed Pat McGibbon, chief knowledge officer of AMT – The Association for Manufacturing Technology, McLean, Va. “It’s going to look like a modest number,” he noted. “But it won’t be modest for the people going through it.”
To try to curb inflation, the Federal Reserve Board continues to increase interest rates. Such incremental boosts, however, can take time to have a meaningful impact, Fiore noted.
The year ended with some optimism, relatively speaking. Purchasing and supply executive respondents to ISM’s Report on Business study predicted that capital expenditures will increase year-over-year by a modest 2.6 percent in 2023. This is down from a 12 percent jump last year over 2021 levels.
The manufacturing sector has mostly recovered from the effects of the supply chain shock stemming from the global pandemic and Russia’s war in Ukraine, according to Berk Birand, co-founder and CEO of Fero Labs. That’s the good news. But, he cautioned, there are still significant challenges—as well as myriad opportunities—ahead in 2023 and beyond. Most notably, he pointed to tightening budgets amid an increasing likelihood of a recession, albeit with a relatively soft landing and the recovery starting by the second half of the year or early 2024.
Leading the list of challenges is the ongoing labor shortage, which is expected to worsen this year. The situation is compounded by supply chain uncertainties and inflationary pressures.
ISM’s Employment Index was 51.4 percent in December, which was an improvement from the 48.4 percent rate in November.
Muthukumaran Jeevanantham, general manager, Bonded Abrasives and Super Abrasives, NAM, Saint-Gobain Abrasives Inc., Worcester, Mass., cites four major challenges: workforce shortages; supply chain uncertainties; rising energy costs; and sustainability.
All require innovative approaches, Jeevanantham said. “For example, post-COVID, there is much more reflection on work-life balance. While this is very much required and healthy, it also poses certain operational challenges—for example, night shifts or weekends.”
Birand expects spending to be down across the board in 2023 when it comes to capital expenses and mergers & acquisitions. Despite reaping huge profit margins in recent years, even through the first half of 2022, he said the focus has now shifted to aggressive cost cutting.
Still, most projections are tempered with optimism.
“All indications are that the service sector will slip into recession in 2023, but we expect positive production trends continuing in the aerospace, defense, agriculture, and energy sectors,” added Bob Hellinger, president of Emuge-Franken USA, West Boylston, Mass. “The expectation is that manufacturing should still see growth in 2023, albeit slightly less than 2022.”
“No one really knows” about the economy, acknowledged Mary Barra, CEO of General Motors Co, during a December event in Detroit sponsored by the Automotive Press Association. “There are so many variables,” she explained, adding that the automaker is being conservative amid such uncertainty.
These include continuing issues associated with COVID-19, Russia’s invasion of Ukraine, and lingering computer chip shortages.
“We’re still seeing strong demand for our vehicles,” the GM chief said. “We’re just watching. We are setting up our budgets to be very conservative.”
U.S. light-vehicle deliveries totaled near or above 17 million annually from 2015 to 2019. Sales plunged to 14.5 million in 2020 as COVID-19 slammed the U.S. economy, and to just under 13.6 million in 2022. Also, a global shortage in semiconductors has held down production and sales since then. Sales are forecast to rise to 14-15 million in 2023.
“That’s still not enough to meet demand,” Jack Hollis, executive vice president of Toyota Motor North America, said at a media event in Detroit in December. “We expect to be supply constrained. We can’t produce enough.”
S&P Global Mobility expects global new light-vehicle sales to reach 83.6 million in 2023, a 5.6 percent hike from 2022. “The auto industry continues to navigate supply chain challenges while confronted by several markets facing deteriorating economic conditions and fading pent-up demand,” S&P said.
The supply of semiconductors is a priority beyond manufacturers. Last year, the U.S. Congress passed the CHIPS and Science Act of 2022, which was signed into law by President Biden. The law is intended to make investments to “strengthen American manufacturing, supply chains, and national security, and invest in research and development, science and technology, and the workforce of the future,” according to a White House statement.
The Biden administration said passage of the legislation spurred companies to make an additional $50 billion in U.S. semiconductor production. “The CHIPS and Science Act will boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems,” the administration declared. The legislation was applauded, with companies hopeful about the near-term effect.
“As a result of the 2022 CHIPS Act, the semiconductor industry will be flourishing in the U.S. economy in 2023,” said Ravi Kunju, chief product and strategy officer of Altair Engineering Inc., a Troy, Mich.-based data analytics and artificial intelligence specialist. “Increased state and local government investment, as well as corporate, will lead to more high-tech hiring.” At the same time, Kunju noted: “The shortage issues won’t end in 2023. It will take years to build local plants and bring the semiconductor industry back on track.”
Even industries with strong long-term prospects may face challenges in 2023. In November, consulting firm Harbour Results Inc., Southfield, Mich., forecast that spending on automotive tooling would rise to $8.3 billion by 2025 from $5.7 billion in 2022.
The major reason is the auto industry’s investment in EVs. At the same time, Laurie Harbour, the company’s CEO, said spending likely wouldn’t rise much in 2023. “Next year is not planned to be a big year,” Harbour said, referring to 2023. The EV investment, she added, will be felt in 2024-2026. Until then, there will be “a hold” until “there’s a flow of product” from EVs, Harbour predicted.
In the short term, the consultant said supply chain issues may spur a “relatively short and shallow” recession. Long term, Harbour added, referring to automotive tooling, “I’m really bullish on the industry. I’m pretty bullish on the state of manufacturing. Demand continues to be strong. Supply is becoming ever so stronger. There are some positive trends for manufacturing. I think manufacturing is in a better spot than other industries.”
Despite ongoing challenges and uncertainty, analysts and industry executives are optimistic about the aerospace and defense (A&D) industry for the next five years and beyond. Commercial air travel is booming after a two-year slump in the wake of COVID-19—global passenger traffic is forecast to return to 2019 levels by the end of 2023 or early 2024. Meanwhile, the defense industry, which was more insulated from the impact of the pandemic, is poised for growth.
According to Deloitte’s 2023 A&D outlook survey, 88 percent of senior executives characterized the general business climate for the industry as “somewhat to very positive.” Deloitte also cited several promising trends, including growth in new technologies and segments such as advanced air mobility, evolving business models for space-related programs, and the use of digital threads and smart factories.
Near term, however, ongoing supply chain disruptions have impeded growth. Shortages of key materials and parts—from castings and forgings to semiconductors and rocket motors—have delayed production and made it difficult to add capacity, despite significant demand.
Inflation also is a major concern. More than half of respondents in Deloitte’s outlook survey listed price increases as one of the biggest risks in 2023.
Passenger travel is directly related to ticket prices, which is driven in large part by jet fuel prices. To address this challenge, OEMs are increasingly investing in aircraft and engine design to make them more fuel efficient and reduce operating costs. They also are developing lower- and zero-emissions commercial aircraft.
Change also is coming to manufacturing software.
“As manufacturers seek the ability to maneuver complex operations regarding supply chains and inventory, turning to ERP can enable the tracking and automation of routine tasks,” said Matt Heerey, president of the manufacturing division of ECI Software Solutions, Fort Worth, Texas. “Data and analytic optimization remain critical tools, and ERP will continue to play a significant role in centralizing operations.
“We started to see more manufacturers adopting real-time data capabilities as a result of the delays and challenges COVID caused,” he continued. “We can expect this trend to continue as we move into 2023.”
Indeed. The new year will be characterized by “macroeconomic uncertainty” with the ongoing threat of recession and sky-high inflation, compounded by labor shortages, according to Joe Campbell, senior manager of application development and strategic marketing at Universal Robots. But, he added, “manufacturers that adopt proven collaborative automation solutions can plug labor gaps, improve quality and efficiency, gain certainty, and digitalize their operations. Supply chain reconstruction and reshoring will take time. In the long-term, both trends are positive for the manufacturing sector.”
Others agreed with Campbell’s uncertainty principle. This includes Kristian Hulgard, general manager, OnRobot A/S’ Americas Division, Irving, Texas, who predicts automation will help bring stability to manufacturing processes.
“We expect 2023 to bring increased collaborative automation adoption, driven by labor shortages, reshoring drives, and the need for continuity in uncertain times.”
ECI’s Heerey added: “Through real-time data capabilities, manufacturers can be made aware of issues or delays instantly. This flexibility makes manufacturers better prepared to make smarter business decisions. Manufacturing relies on a large amount of legacy equipment that businesses often don’t see an urgent need to replace or upgrade because the functionality continues to serve them. As the world continues to move toward automation, businesses need to upgrade their software.”
Manufacturers have already begun changing how they work, including more local production. “One can sense a future where products are made on-demand, closer to customers,” noted Justine Crosby, vice president of marketing at San Francisco-based Bright Machines. “Today’s automation driven by intelligent software is re-energizing industrial business transformation,” she added.
The past two years have demonstrated why cybersecurity “is a necessity,” asserted Ryan Moody, president and CEO of ABS Group. “I predict we will start to see companies increase their budgets accordingly as attacks continue and new best practices are developed. One area that is likely to see an influx of investment is cyber training and programs specifically for those running OT systems.”
Meanwhile, the aftereffects of the global pandemic along with ongoing trade disputes, labor shortages, and supply chain disruptions, contributed to companies evaluating options to reshore and near-shore production to mitigate future risks. “In 2023, economic uncertainty will put additional momentum behind the technology that makes reshoring possible,” said Bright Machines COO Paolo Avagliano. “In creating a distributed network of factories, automation offers a better handle on costs and enables a high leveling of flexibility.”
3D printing may be deployed as a way to deal with supply chain issues. “Organizations have continued to integrate additive manufacturing into their production operations to mitigate supply chain risks,” said Jeffrey Graves, president and CEO of 3D Systems, Rock Hill, S.C.
“I believe we’ll see significant momentum in the use of AM to increase the velocity of innovation in the health care, industrial, and pharmaceutical industries,” he predicted.
The manufacturing industry faces myriad challenges and opportunities in 2023. Here are some of the key drivers and trends, according to Berk Birand, co-founder and CEO, Fero Labs:
The inflationary environment will continue until early 2024. Cost-cutting will become extremely important.
There will be more activity in infrastructure sectors (steel, cement) due to the U.S. Infrastructure Bill.
Workforce issues will continue with a perfect storm of low unemployment rates and more open positions than ever. The industrial sector will be threatened by labor shortages due to an aging workforce (and because there are few entrants in the industrial labor market).
There will be investment upticks in data storage, “sensorification,” and white-box machine learning.
Progress toward 2030 decarbonization goals will be a priority across sectors.
Source: Berk Birand, co-founder and CEO, Fero Labs.
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