Last year, which began with a banking crisis and ended with high interest rates and low unemployment, was a challenging year for small businesses. Constrained monetary policies made borrowing to fund growth more expensive, while the tight labor market increased labor costs.
In addition, the American consumer, whose spending accounts for most small business revenue, began to show signs of exhaustion. While consumers continued to spend freely for much of the year, rising personal debt, declining household savings and rising costs of essentials such as rent, healthcare and groceries, meant a flattening of discretionary spending in the latter half of 2023. As we start 2024, all eyes are on the Federal Reserve as interest rates hold the key to employment, the housing market and spending.
These trends are no exception for the manufacturing sector, which also must contend with persistent disruptions in the global supply chain as wars, pirating, geopolitical posturing and severe weather combine to disrupt global trade. Over the last several months for example, shipping lanes connecting Europe to the Middle East and Asia have been sabotaged by militants intent on disrupting shipping through the Red Sea. At the same time, ships passing through the Panama Canal between the Atlantic and Pacific oceans have seen significant delays due to droughts throughout the region that limits the water necessary to operate the passageway.
In addition, the ongoing war in Ukraine and continued geopolitical tensions in the Taiwan Straight make international supply chains difficult to manage.
As a result, Kapitus predicts a continued trend toward the repatriation of manufacturing to the United States and its near-shore allies in 2024. The trend will likely benefit most U.S. manufacturers as businesses seek shorter and more reliable supply chain alternatives. Because so many manufacturing components are also sourced overseas, however, domestic manufacturers will need to assume some of the supply chain risk their customers hope to avoid. As a result, we believe more manufacturers will explore vertical integration strategies to secure their supply chains; on- and near-shore alternatives also are expected to increase.
The U.S. government is also promoting the repatriation of manufacturing to the U.S., with the 2021 Infrastructure Act and the 2022 Inflation Reduction Act both offering incentives to companies that add domestic manufacturing capacity and source from U.S. manufacturers. These incentives will continue to have a positive effect in 2024 as more of the funds allocated to domestic manufacturing are released.
In addition, new manufacturing technologies are being integrated into manufacturing facilities, creating efficiencies and helping to reduce the labor cost differential between the U.S. and overseas markets. Continued cost reduction is critical as a strong dollar hurts the competitiveness of U.S. manufacturing and slows the overall repatriation trend. Now that the Fed has indicated an end to the tightening cycle, there is hope that the dollar’s strength will subside, creating additional export opportunities for American companies.
All in all, we project that 2024 will be a better year for U.S. manufacturers as the Fed executes the soft landing it has been seeking since the current cycle began. This means lower interest rates for U.S. firms financing inventory and expansion. It also means more spending power for consumers and a continued tight labor market.
While Kapitus anticipates significant challenges on the geopolitical and supply chain front, we are optimistic about the overall economy and the role of U.S. manufacturing in the world.
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