This article is provided by ITR Economics in partnership with IMEC.
ITR Economist and Speaker Michael Feuz provides our outlook for the US manufacturing industry in 2024 and over the next few years. He details how long each market will be under the economic pressures of a recession phase, the challenges clients are facing, insights into positioning your business for future economic growth, and advice for business leaders for the second half of the decade!
Q: What is the current state of US manufacturing right now and for the rest of 2024?
Michael: Overall, US manufacturing is on the back side of the business cycle. Looking at the different sectors, the majority are either in Phase C, Slowing Growth, or Phase D, Recession.
Our expectation for the rest of this year is sluggishness. The downturn will be relatively mild due to onshoring and government subsidies into certain parts of manufacturing. Think of the CHIPS and Science Act and the high-tech sector for manufacturing production. Chips, communications equipment, computers – those are getting a boost. That will help mitigate the overall US manufacturing decline. I would characterize it more as generally flat with a downward bias.
When you prepare for downturns, if you have those strategic Management Objectives™ and know when to implement them, it is a lot easier to lead with confidence through such tougher periods.
Q: How long will this period of economic decline last? How soon will most manufacturing markets transition to a recovery phase?
Michael: We expect the first half of 2025 to be that recovery phase. A few sectors will be in Phase A, Recovery, in the early part of 2025, and by the end of 2025, most markets will be in Phase B, Accelerating Growth. Just making sure you understand your sector is always important. Looking at the Trends Report™ can be key because you need to think about the different segments of the economy as if they were rail cars on a train.
Of course, there will be some exceptions to the growth outlook for 2025. US Civilian Aircraft Equipment Production will decline slightly in 2025 following rise this year. The same can be said for US Medical Equipment and Supplies Production. We expect defense spending to move countercyclically relative to the broader economy, but political developments present significant risk to this outlook.
Q: What are some common challenges manufacturing businesses are facing?
Michael: High levels of inventory have certainly been an obstacle that manufacturers have had to overcome. During the supply chain constraints, there was a lot of over-buying. This was putting upward pressure on prices, but consumers were willing to pay due to demand. As inventories built up, demand started to soften. This has been an ongoing challenge, and it is looking like it is beginning to improve.
If you look at the sales-to-inventory ratio for wholesale goods, specifically non-durable goods, inventories are stabilizing. The durable goods side, which is still showing signs of bloated inventories, still has a way to go, but it is moving toward stability.
Wage pressures persist. While there has been some softening, the pressures are still present due to labor constraints.
Q: What advice are you giving to manufacturing clients to succeed in the second half of the decade?
Michael: If your business is feeling the economic slowdown or even contraction while in Phase D, Recession, make sure you are making data-driven decisions and leading with optimism. It is much easier to lead with optimism when you develop a plan and know when you are going to implement it.
If you can then communicate this plan to your employees, it builds that confidence all around. Communicating the plan to your employees will also help you retain them, as they will have confidence in your plan and your leadership.
This is even more important with the ongoing labor constraints. If you correlate well with US manufacturing, the low point is approaching, and soon you are going to feel that upswing. Follow your leading indicators to know exactly when to expect the turning point. You will begin to feel the return of demand and that recovery by around the end of this year to early 2025, and growth will resume in 2025.
Be sure to put on the blinders and tune out the media sensationalism. Use this time to prepare for the coming return in demand so you can capitalize effectively on it. Data-driven decisions will set you up for success.
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