Today, the manufacturing sector seems to be thriving. But there may be dark clouds on the horizon. It’s critical for business owners to focus on growth opportunities while preparing for the possibility of stormy conditions ahead. Here’s feedback from the trenches, along with current trends that are on manufacturers’ radar screens.

NAM Survey

Over the last decade, manufacturing has been recovering from the Great Recession. After hitting rock bottom in 2009, the sector has largely rebounded, and optimism is high.

Today, nearly 90% of manufacturers feel “somewhat” or “very positive” about their company’s outlook, according to the Manufacturers’ Outlook Survey First Quarter 2019 from the National Association of Manufacturers (NAM). Top reasons for sustained optimism include decreased government regulation and corporate tax cuts.

Survey respondents expect sales growth of 4.4% in 2019. It just so happens that this is also the rate of growth the Federal Reserve estimates will be needed for the manufacturing sector to reach its December 2007 (pre-recession) level of output. In other words, a full recovery from the Great Recession may soon be within the sector’s reach.

Trends

Currently, manufacturers are focused on the following developments:

Human resource (HR) issues. The inability to attract and retain qualified workers is respondents’ top concern in the NAM survey. Unemployment rates are currently near 50-year lows. In fact, the U.S. Department of Labor reports that the monthly rate of unemployment has been below 5% since April 2016.

With high demand for skilled labor, there aren’t enough qualified job seekers to fill vacant positions in most geographic markets. Along the same lines, the skills gap and rising wage rates remain longstanding problems in manufacturing. These problems threaten your company’s growth, profitability and ability to innovate.

Manufacturers’ human resource challenges don’t stop there, however. NAM survey respondents’ second biggest concern is rising health care and insurance costs. Specifically, respondents expect health insurance costs to rise another 6.8% in 2019, further eroding profits.

How can you ease your company’s HR concerns? Creativity is key. For example, some manufacturers are partnering with universities and government agencies to train staff and share resources. Others are recruiting through apprenticeship programs and technical schools to help identify prospective employees with the right skill set.

To lower health care costs, some employers are cutting back on health care benefits for employees’ family members, implementing preventive wellness programs, or hiring older workers who receive health care benefits through Medicare, rather than an employer.

When cutting back health care benefits, employers may need to supplement their offerings with alternatives that cost less but are valued by employees. Examples include free lunches, tuition reimbursement programs and flexible work hours.

Diversity. Across all industries, public awareness of diversity issues has grown. As a result, companies face increased government and stakeholder scrutiny of these matters.

In general, diversity is good for business operations. Diverse management teams and boards of directors are better equipped to generate out-of-the-box solutions, avoid group thinking and comprehensively monitor financial reporting.

Has your company implemented a program to boost workplace diversity? In addition to increased gender, race and ethnic diversity, consider diversifying in terms of professional skills and experience. For example, your teams should include people with accounting, cybersecurity, and information technology backgrounds. Other types of professional experience, such as marketing and HR, also could contribute to diversity.

Trade issues. U.S. manufacturers increasingly engage in business operations outside of the United States. Our top trading partners are Canada and Mexico. In fact, U.S. factories sell more to these two trading partners than to the next 10 trading partners combined.

More than three-quarters of respondents believe that passage of the United States–Mexico–Canada Agreement was important for their companies, according to the latest NAM survey. In addition, nearly half believe trade uncertainty and tariffs have impacted their company’s business plans and outlook negatively.

Whether you do business with Mexico, Canada, China or countries in the European Union, global uncertainty abounds. This is a wild card that could seriously hamper the sector’s growth, depending on what happens with global trade negotiations over the next year. If your company sells products or buys materials overseas, consider having a domestic back-up plan for your supply chain needs.

Automation, smart factories and analytics. Technology has revolutionized factories. Starting in 2018, recent tax reforms have freed up corporate cash flow and provided tax incentives for companies to expand their facilities, upgrade equipment and invest in new technologies. The NAM survey reports a 2.8% expected growth rate for capital investments over the next year. Much of the budgeted expenditures will be aimed at boosting technological capabilities.

In particular, the sector’s use of artificial intelligence (AI), the Internet of Things (IoT), additive manufacturing and data analytics is expected to grow. The forthcoming 5G rollout — expected sometime in 2020 — will deliver major improvements in download speeds and the ability to remotely control devices. As a result, factories will continue to evolve into connected “smart” networks of people and machines.

AI can take many forms, including:

• Virtual reality and wearables,
• Robots,
• Industrial sensors,
• Machine vision, and
• Three-dimensional (3D) printing.

For example, manufacturers can use 3D printing to decrease waste, reduce wait time and recycle the materials. In addition, 3D printing can make short production runs cost-effective, facilitating customization by smaller, high-margin customers.

Technology also generates volumes of real-time data that proactive manufacturers use to gain insight into their operations and make actionable, informed decisions. Predictive analytics helps companies anticipate what will happen in the future, rather than just reacting to past events.

The downside to technology is cyberattacks — and, unfortunately, the manufacturing sector is a top target. Reasons hackers target manufacturers include their reliance on devices that are wirelessly connected to the company’s systems, the prevalence of valuable data stored on the cloud and shared with supply chain partners, and the use of legacy systems and patches designed to converge incapable systems.

Manufacturers need to strike a balance between their security and innovation needs. If you haven’t already, identify and implement proactive measures to fortify your company’s defenses against cyberattacks.

What Lies Ahead?

Though manufacturers are largely optimistic about the sector’s outlook, NAM’s survey found that confidence levels have fallen from a peak of 95% in spring 2018. And survey respondents warn that a reversal of pro-growth federal policies could further impair their sunny outlooks.

Specifically, when asked what might happen if Congress rolled back tax reforms under the Tax Cuts and Jobs Act (TCJA), two-thirds of respondents said they’d cut back on capital investments and more than half said they’d scale back on hiring.

One thing is certain: The manufacturing boom won’t last forever. After a decade of prosperity, a downturn is expected, according to the Duke University / CFO Magazine Global Business Outlook survey for the first quarter of 2019. The survey found that roughly two-thirds of CFOs believe that the United States will be in recession by the third quarter of 2020. And 84% predict the start of a recession by the first quarter of 2021.

Time to Plan

Our professionals specialize in providing accounting, tax and consulting services for the manufacturing industry. Contact us for ideas to help you take advantage of growth opportunities and minimize potential risks and threats that loom on the horizon.