Manufacturing & Distribution

Q3 2022 Report

6 Manufacturing Insights from Q3 2022 and What They Mean for You

 
After strong post-pandemic economic growth in 2021, we are seeing early signs of slower growth and a potential economic downturn. For manufacturers, inventories are beginning to sit on shelves and new orders are starting to dissipate. Recent reversals in input prices and railroad traffic also indicate weaker future demand. Labor challenges continue as high demand and low supply has workers quitting and migrating to higher paying opportunities. However, to remedy the labor shortage, manufacturers are increasingly using more industrial robots as installations rose faster than expected in 2021.

Surveys from the Institute for Supply Management (ISM) show inventory exceeding new orders for the first time since the COVID-19 pandemic began. The implication is that demand is falling as new orders decline and inventories pile up, a leading indicator of contraction in the manufacturing sector.

What this means for you: Expect lower demand as the economy slows. Consider changing inventory or component ordering and production schedules in anticipation of a weakening environment. Before considering ramping up production, watch for new orders to surpass inventories. 

Input prices have retreated from their recent highs, apart from cement and plastic, which often lag other inputs. The directional change of input prices may indicate that we have reached an inflationary peak, and possibly, the onset of an economic slowdown.

What this means for you: Lower input prices will relieve some inflationary pressures in costs of goods sold (COGS), resulting in high gross margins and gross profit. However, the rolling over of copper may also indicate a slowdown in demand. Consider adjusting production forecasts and analyze slow growth and contraction scenarios to understand future profitability. 

After ramping up production to keep up with post-pandemic demand, the average weekly hours of production have since subsided as demand begins to revert. So far, in 2022 the average weekly hours of production have fallen 1.2%. While this isn’t a large decrease, it is much lower than what was experienced in 2021.

What this means for you: Keep a close eye on demand as we enter a potential turning point in the economy. Consider how to flex labor hours in production with demand and slow hiring.

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.

The number of unemployed workers in manufacturing are near all-time lows and layoffs are calm, yet the number of employees quitting is accelerating at a historical rate. This combination suggests that manufacturing labor is becoming scarcer as more workers leave the manufacturing labor force in search of competitive wages.

What this means for you: As the battle for labor intensifies, make sure your compensation packages for your existing and potential employees are competitive. Consider expanding temp staffing opportunities to supplement higher quit rates. To reduce high turnover, look to implement or improve incentive-based programs and benefit packages to retain your existing employees and attract new employees. 

Manufacturers are increasing their investment in industrial robots to remedy supply chain bottlenecks due to the pandemic and improve the scalability of their business. In 2021, 487,000 industrial robots were installed in the US, which far exceeded the 435,000 expected.

What this means for you: Look to allocate more dollars to investments in industrial robots. Doing so can relieve supply chain and labor shortage issues that have emerged since the pandemic. A greater use of industrial robots can also improve scalability, efficiency and keep your business more competitive.

Railroad traffic tends to be a leading indicator of demand. Rail carloads have been decreasing as the economic growth rate slows and demand diminishes. 

What this means for you: Pay close attention to railroad traffic and other measures of demand as the US transitions into a phase of slower economic growth. In preparation for lower demand look to swap fixed expenses into variable, evaluate hiring needs and accelerate production decisions in preparation should demand diminish further.

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.