Tracking the Manufacturing Slowdown

Recent economic manufacturing data suggests a US economy in a downturn (and likely, overall, in recession). In March, ISM’s Manufacturing Index declined for the fifth month in a row (after growing for 28 months before the decline commenced at the end of 2022), at a level signifying material economic contraction and a likely recession. Overall, every single sub-index comprising the overall ISM Manufacturing PMI contracted for the first time since May of 2009.

In its latest report, ISM suggests that the PMI stood “at its lowest level since May 2020, when it registered 43.5 percent.” Particularly bearish in the report was the “New Orders” sub-index which “remained in contraction territory at 44.3 percent, 2.7 percentage points lower than the figure of 47 percent recorded in February.”

According to ISM and Reuters, buyer anecdotes are generally negative. “Transportation equipment producers said “sales are slowing at an increasing rate.” Electrical equipment, appliances and components manufacturers reported “new orders are starting to soften.” Makers of chemical products said “sales (were) a bit down, and budgets being cut with a greater emphasis on savings.”

Interest rates remain stubbornly higher and continue to increase as the Fed attempts to combat inflation. This impacts borrowing costs not only for manufacturing in terms of capital investment (e.g., new or used industrial equipment), but also in buying raw materials, components and finished goods, driving up inventory carrying costs for all production inputs as well. Summarizing the situation, The Wall Street Journal recently suggested that, “weaker manufacturing data suggests that consumers and businesses are starting to retrench in the face of economic uncertainty.”

In particular, “The Fed’s aggressive pace of interest-rate increases to fight inflation has made it more expensive to borrow for big-ticket items such as consumer appliances or business machinery.” But perhaps the two largest canaries in the economic manufacturing coal mine (which are gasping for breath if they’re still alive) are consumer demand and consumer borrowing.

Data from the automotive industry highlights the challenge, as U.S. new-vehicle inventory exceeded 1.8 million units in March, representing a 73% rise from the same period last year even as sales remain relatively strong due to what multiple industry analysts describe as “pent up demand.”

However, dig below the high level numbers, and signs of weakness are clear with domestic manufacturing. Automotive News suggests Ford new car inventory is sitting at 60 days, GM at 25 and Chrysler/Dodge (Stellantis) at 68 days. Foreign manufacturers, such as Toyota, are in better shape given continued supply chain challenges at ramping up production to meet demand.

One of the challenges for all manufacturers is that new car prices are up almost 50% since pre-Covid levels, reports Car Dealership Guy on Twitter (averaging close to $50K). And as both unit and borrowing costs increase, some buyers are even opting to finance cars over a ten-year period, reports the popular Twitter handle.

For US manufacturers, the situation that one expert we spoke with suggests an “unsustainable” situation as prices continue to increase for end users, borrowing costs remain at decades high levels (up and down the supply chain) and domestic inventory builds.

In short: look for a potentially even sharper level of manufacturing contraction in the second half of 2023. Manufacturers should prepare by aggressively focusing on sourcing and cost reduction, reducing inventory levels and ensuring they have limited exposure to potential customer lending defaults if the current economic challenges result in a hard economic landing.