The Latest Trends in the Manufacturing Economy
As we round the corner into the end of 2023’s first quarter, the Institute for Supply Management (ISM) has issued its February 2023 Manufacturing ISM Report On Business. On the surface, the report reveals everything analysts expected: another month in contraction territory, with trends conflating manufacturing’s struggles and broader economic turndown. Between the lines, there’s more than meets the eye.
Let’s dive into the February report and explore the trends and nuances emerging to set the tone for 2023.
Signals of a slowing economy
The February 2023 ISM report reflects a less-than-stellar picture of the economic situation many manufacturers are feeling acutely. For the fourth consecutive month, economic activity in the manufacturing sector contracted, although the PMI was up slightly from the previous month (0.3%). Metrics showed a steady decline, with a few outliers to exacerbate the feeling of economic headwinds.
While New Orders saw a strong uptick, demand remains in contraction for manufacturers. This has pushed Backlogs back down to manageable levels. Supplier Deliveries shrunk marginally (0.4%) as companies struggle to find and retain workers. Employment dropped 1.5% in February, despite the economy adding 311,000 jobs, according to the Bureau of Labor Statistics.
Most egregious (and worrying) is the uptick in Prices, which rose 6.8% in February, to the dismay of manufacturers who are already facing shrinking margins. It’s a sign the supply chain woes and inflation concerns haven’t yet run their course.
Rate hikes could hamper manufacturing further
One of the biggest concerns for manufacturing today isn’t contraction but rather the possibility things could get worse before getting better. Unfortunately, this likely will come through federal intervention in the form of rate hikes.
The federal reserve has issued steady rate hikes over the past 14 months. Now, in March, Federal Reserve Chair Jerome Powell announced rates could go “higher than previously anticipated” and possibly rise at a faster pace than a quarter point at a time. This surge toward higher rates is likely to leave manufacturers scrambling to keep up in everything from equipment financing to long-term debt obligations.
As the looming threat of a rate increase hovers over them, manufacturers are looking at reduced demand and shrinking margins with fears contraction might become recession — or, worse, depression.
Continue bracing for turbulent times ahead
The February ISM report seems to relay the obvious: Manufacturing is in the doldrums. Instead of waiting for things to get better or worse, producers should act to define certainty in their own future.
Manufacturers must protect their core by building resilient and efficient supply chains, closing supply-demand gaps, and investing in sustainability. The U.S. economy remains too volatile to forecast easily, and companies must create stability where they can to remain competitive in an unpredictable global marketplace.