Is a Manufacturing Slowdown Imminent?
Talk of economic turmoil and impending recession are making waves in the manufacturing industry as we enter the back half of 2022. And, unfortunately, industry data seems to confirm this trajectory. In July, signs of a manufacturing slowdown began to emerge. The question isn’t if there will be a period of contraction, but when — and how long it could last for manufacturers. While these are still unknown variables, what we do know are the catalysts behind the slowdown, which stem primarily from inflation.
Manufacturing data doesn’t lie
All it takes is one look at the Institute for Supply Management’s 2022 Manufacturing ISM Report On Business to recognize we’re headed for a manufacturing slowdown. Much of the data presented in July — stemming back to the first quarter — indicate a slowdown is imminent. Some of the primary data points from July supporting this include:
- New Orders dropped 1.2 percentage points, quickly sliding deeper into contraction territory.
- Production slowed down by 1.4 points and has remained depressed throughout the year.
- Order backlogs decreased 1.9 points, steadily falling from highs in May 2022.
What’s driving the potential slowdown? Inflation is one big concern, with a leader from the Food, Beverage & Tobacco Products sector saying, “Growing inflation is pushing a stronger narrative around pending recession concerns. Many customers appear to be pulling back on orders in an effort to reduce inventories.”
Supply chain issues are a big part of the problem as well. One executive representative from the Machinery sector states, “New order entry has slowed down slightly; however, logistical issues have yet to improve. Long lead times for materials and labor shortages are still a major problem.”
As these headwinds and others continue to blow strong, manufacturing is hunkering down, bracing for an imminent slowdown.
How a slowdown will affect the economy
Throughout American history, manufacturing has been the country’s economic backbone and one of the key drivers of economic growth. In 2020, manufactured goods accounted for nearly 12% of America’s overall GDP, which means even a temporary slowdown will impact the economy and the country’s ability to generate wealth. Even concentrated, a manufacturing contraction has a ripple effect, spreading economic pain to related industries.
Put simply, a manufacturing slowdown can put the U.S. at risk of falling into a full-blown economic recession or, worse still, depression. Manufacturing often serves as a “canary in a coal mine” for economic indicators, which means speculation about recession starts by looking at manufacturing output.
Manufacturing woes are a worldwide concern
An impending manufacturing slowdown isn’t just bad news for the United States. Other developed countries are seeing a contraction, too. China, for example, has seen production and logistics problems for more than a year due to lockdowns from the COVID-19 pandemic. The U.K. also is experiencing contraction, with its factory output falling for the first time in nearly a year and a half.
With global economies so interconnected today, slowdowns affect producers around the world in a similar way. All signs point to an imminent global slowdown, which will have significant consequences for economies around the world. Here at home, the signs of that slowdown are already evident.