Manufacturing & Distribution

Q1 2022 Report

6 Manufacturing Insights from Q1 2022 and What They Mean for You

 
Manufacturing continues to look strong as the US economy recovers from the pandemic that started nearly two years ago. However, the sector faces challenges of inflationary costs, scarce labor and constrained supply chains. Furthermore, new trends in reshoring and environmental, social and governance (ESG) suggest manufacturers may need to restructure their operations for a new sustainable supply chain landscape. 

1. Manufacturing business conditions remain strong

Business conditions remain strong for the manufacturing sector as readings greater than 50 indicate expansion. While the current index reading of 57.1 is noticeably above mark 50, the index has been slowly trending downward off its previous high of 63.7 one year ago.  

What this means for you: Expect these conditions to be accompanied by sustained demand and plan for increased production to meet that demand. 

2. Supply chains are improving, but remain relatively constrained

Readings on the ISM Supplier Deliveries index greater than 50 indicate slower delivery times, which shows that constrained supply chains continue to hamper supplier delivery times for manufacturers. However, despite supplier delivery times being relatively slow, we have seen improvement over the past year as the index has fallen from 76.6 a year ago to 65.4 today. While this progress may slow due to COVID outbreaks across the Pacific and government policies to manage the spreading of cases, we believe it should trend toward the 10 year average of 54. This progress may slow due to COVID outbreaks across the Pacific and government policies to manage the spreading of cases.

What this means for you: Expect to have continued difficulties getting supply online until we see further improvement in the supply chain and delivery times. Plan ahead to manage these challenges and increase communications with suppliers, customers and sources of financing. 

3. Google Trends data highlights changing nature of supply chains

For decades, companies benefited from the relative cost advantage of overseas production, and as a result, developed countries became more dependent on a globalized economy. However, security and control have become priorities post-pandemic. Google Trends suggests more manufacturers are considering reshoring to keep up with customer demands.

What this means for you: According to Thomasnet, 83% of U.S. manufacturers indicate they are likely or extremely likely to re-shore. Consider domestic sources to mitigate global supply chain bottlenecks and to meet the demand of your customer base. If costs are higher from domestic suppliers, analyze how easily or how much of these additional costs can be passed on to your customers as demand remains high.

As the world places greater emphasis on sustainability, more companies are developing ESG initiatives to meet these demands, including from customers. Google Trends data suggests that sustainable supply chain interest has increased exponentially over the past few years.

What this means for you: Plan for greater interest from customers around sustainable business practices and start building strategies, relationships and capabilities, including measurement, to protect and grow market share. Opportunities may involve incorporating alternative energy sources such as renewables or solar and replacing machinery with more efficient options. 

Adam Beckerman is Aprio’s Manufacturing and Distribution Leader and Assurance Partner. Adam's team of 30 professionals focus on the manufacturing industry with 20+ years of experience enabling the success of manufacturing start-ups, growth companies and businesses preparing for equity events. Schedule a consultation.

4. Input prices maintain their strong momentum

Input prices continue to rise as inflationary pressures drive them higher. Notably, industrial metal prices rose more than 46% in the past year. Energy prices have also accelerated on the onset of the conflict between Russia and Ukraine.

What this means for you: Commodity prices tend to be more momentum-driven than other costs. With no sign of commodity prices slowing down, revisit annual budgets and assume further increases in input costs. 

5. Demand for labor is high and rising

To keep up with a growing economy and an expanding manufacturing sector, the number of job openings has risen significantly since the lows of the pandemic. High quit rates in the manufacturing sector have also contributed to the large rise in job openings as the demand for low-skill labor has workers migrating to job opportunities that pay more.

What this means for you: With employee turnover rates high and rising, be deliberate in identifying, hiring and especially retaining higher-productivity employees. Consider expanding incentive-based compensation policies and non-financial benefits to increase employee retention.

6. Wage growth continues to accelerate

With a greater circulation of money from quantitative easing amidst the pandemic and a high demand for low-skill labor (as indicated in the previous chart), wage inflation continues to accelerate. While manufacturing wage growth is below the national average, it is still relatively high compared to its own history.

What this means for you: Wage inflation is likely to continue given the high demand for workers in a scarce labor pool. To help mitigate the costs of bringing on new workers, increase focus on retaining existing employees that keep labor costs relatively low.

Simeon Wallis, CFA, is the Chief Investment Officer at Aprio Wealth Management, and the Director of Aprio Family Office. Each week Simeon brings you insights from the financial markets in Aprio’s Pulse on the Economy. To discuss these ideas and how they may affect your current investment strategy schedule a consultation.