Is It Time To Brace for Recession?
The word “recession” is almost taboo, but the media loves to use it in over-hyped headlines. Hype makes it difficult to tell if the news is hyperbolic — or if we’re on the verge of an actual recession. Lately, all signs point to the latter. It’s time to look past the headlines and consider what it means for the manufacturing sector if the United States is on the brink of a recessionary period.
Manufacturing executives brace for downturn
Based on current economic headwinds, recession seems all but inevitable — at least, according to manufacturing executives. A CNN Business poll found the primary driver of concern is the two-pronged threat of inflation and supply chain issues. From the report, “Three-quarters of manufacturers say inflationary pressures are worse today than six months ago, with 54% also saying higher prices are making it harder to compete and remain profitable.”
While still hoping for legislation that improves conditions for a renewal of domestic industry, many manufacturers are already taking evasive action by increasing inventories, cutting costs, and streamlining production to preserve their bottom lines.
Interest rates pose a particular challenge for manufacturers
Raising interest rates is one of the primary tools the government uses to fight inflation, a strategy which can take a heavy toll on a CAPEX-heavy industry like manufacturing. With most manufacturers financing equipment and fixed asset purchases, rising interest rates carry implications for everything from revenues and profits to cash flow and budgeting.
Since the beginning of 2022, the Fed has raised interest rates three times. The latest hike of 75 basis points is an aggressive move against inflation. For many manufacturers, it means the cost of borrowing just got significantly higher — a situation causing some to adjust their earnings expectations and reevaluate budgets as they seek to preserve profits.
And it doesn’t look like the Fed is finished. With more rate hikes anticipated in 2022, the outlook for manufacturing is beginning to look rocky.
Pressure on both sides of the equation
As manufacturers brace for recessionary conditions, problems persist with both supply and demand. Lack of materials and rising prices are running up against shrinking margins and cash flow disruption. This increasingly uncomfortable manufacturing situation mirrors what’s happening in the broader economy as it rolls toward recession.
While it might be taboo to preemptively define a recession, a downturn looks increasingly likely. Major economic models, such as the Bloomberg Economics Indicator, put the potential for recession as high as 72% before the end of the year.
