June 17, 2024

Taylor St Germain:
Hi everyone, my name is Taylor St. Germain with ITR Economics and welcome to this edition of TrendsTalk. We at ITR Economics are your apolitical and unbiased source of economic intelligence. And today I wanted to discuss manufacturing.

I had a few special requests to discuss manufacturing, so I figured it’s a great episode to dive into the topic. I wanted to approach the topic from a few different angles. I wanted to start off with the overall picture of where we’ve been, where we are and where we’re going in terms of manufacturing activity here in the US. So when we refer to manufacturing data, the primary data set that we utilize comes from the Federal Reserve Board. And it’s titled US Total Manufacturing Production. We like to have data sets that are really just looking at volume that are dollar denominated data series that could be impacted by inflation, because it gives us a real idea of the goods that are being manufactured in this country.

So as I look at this manufacturing production data set, I wanted to highlight where we’ve been. If we look back to that 2020 -2021 timeframe, we did see a declining trend in manufacturing really beginning in early 2020 and extending into early 2021. If we look at the annual growth rate for manufacturing production, it bottomed out in February of 2021 down 7%. So that low following the pandemic was 7% contraction in manufacturing here in the United States. And then as we moved into the middle portion of 2021, we started to see that growth rate recover. And by the end of 2021, that growth rate for manufacturing was accelerating.

And it accelerated all the way into the first quarter of 2022, where we saw the peak in the growth rate for manufacturing construction. So we had a low in February of 2021. We had growth that persisted into March of 2022 in terms of accelerating growth in the growth rate, that annual rate of change. We saw the peak in March at 6 .7%. And ever since that peak in March of 2022 at 6 .7%, we’ve seen the annual growth rate for manufacturing slow down. As we look at that slowdown with every month of data, that annual growth rate continued to retreat all the way into August of 2023, when the growth rate came in at 0 .2%. That was the last time we’ve seen a positive annual growth rate for manufacturing construction. Starting in September of 23, that growth rate dipped negative. And with the most recent data point that we have available today, which is April of 2024, that growth rate is still negative.

So, we’re in that contraction phase of the business cycle. Again, it began in September of 23. And as we fast forward into the early second quarter of 2024 with that recent data point, we’re still down below the year ago level. However, the growth rate during this time has really only vacillated between minus 0 .2% down and minus 0 .7% down at the worst of the reading. So even though we are in contraction and have been in contraction for a few quarters, the contraction is very mild. And that’s why I shared with you some of the historical perspective. Again, think back to February of 2021, we were seeing minus 7 .0% on that annual growth rate. And even though we’re below the year ago level now, the worst that we’ve seen in terms of an annual growth rate is minus 0 .7%. So, it’s very clear that this downturn that we’re in in manufacturing is quite mild.

And if you’ve been following ITR, following trend stock, we’ve been talking exactly that, just how mild this contraction is in 2024. Now, of course, the question becomes, so what’s on the horizon for 25 and 26? And the short answer is positive growth rates. As we move into late 2024, we would expect that manufacturing growth rate to get less negative in term positive, especially as we move into 2025. We see 2025 as a period of accelerating growth. in terms of manufacturing production here in the United States. In 2026, it’s likely the growth rate slows down, but still remains positive.

So really what I’m saying here today is, yes, we’re in a period of mild contraction, but it’s not as bad as what we experienced certainly in the last downturn, not even close. And we have growth on the horizon as we look out to the years ahead. And from our perspective, it’s really all about preparing for the growth that’s coming our way in 25 and 26. So we’ve seen a lot of the manufacturers we work with investing in efficiencies, embracing some of these technology trends, building their capacity for this demand that’s coming in 25 and 26. It’s all about taking advantage of slower activity in 24 and using it to your advantage, so that you’re better prepared to take on this growth in 25 and 26.

But with that being said, I do want to highlight some of the areas of manufacturing that are likely going to perform better than others. Again, I’ve just been talking generally about the industry overall. In our trends report in the manufacturing dashboard, we list out 14 different economic data series or sub sectors of manufacturing. And we forecast those data sets forward three years into the future. Out of the 14, there are six that are expected to experience positive growth rates year over year in 2024, which means eight of them are expected to contract year over year, right? And that’s the nature of a mild recession, is that you have some industries that are going to avoid contracting, and then you’ll have some that are down. So let me call out the six that are positive in terms of growth rates for 24. That’s Metalworking Machinery New Orders, the defense industry in terms of Defense Capital Goods New Orders, North America Light Vehicle Production, Oil and Gas Extraction Production, Civilian Aircraft Production, and Medical Equipment and Supplies Production. So those are the six data series that are projected to remain positive in 2024 in terms of those growth rates.

Now, as we look forward to 2025, almost every industry in manufacturing is going to be accelerating in its pace of growth. And that’s, again, why I put so much emphasis on, we need to be using this slower period of time in 24 to be preparing for all this demand that’s coming our way in 2025. I’ve said it before on this podcast, but I’ll say it again, I’m not worried about businesses surviving 24. I’m worried that we’re not prepared for how quickly this growth is going to be coming back in 2025. And if we’re not prepared for growth, that just means we’re turning away benefits to our top and bottom line in 2025.

I wanted to finish off with just a couple of comments around the job market and manufacturing. So if we look at the job numbers again, the most recent data point we have is from April, where we saw the again this comes from the Bureau of Labor Statistics I’m looking at the total manufacturing job openings in the month of April, we still had 510 ,000 manufacturing job openings. Now that is down compared to the post pandemic peak in April of 2022 the record high month for job openings was 993 ,000. So being down at 510 ,000 does mean that there are, of course, fewer job openings and that should be expected, given some of the tightness we’ve seen.

But that’s still a lot of job openings out there that still highlights that even though the hiring situation might be better as we sit here today, compared to 22. That’s still an elevated number of job openings, for example, we’re still well above what we saw in terms of that monthly number back in January of 2021 or December of 2020 when those job numbers were in the low 500 ,000 or high 400 ,000. So yes, the job opening numbers have come down. But from my perspective, those they’re still elevated and that just goes to show this tight labor market that we have that we’re faced with that even during a period of overall manufacturing decline, we’re still seeing 510 ,000 job openings.

We have to find ways as businesses to offset this trend. We have this massive generation, which is the baby boomers moving into the later years of work and for many of them retirement already, we are going to be left with a smaller workforce. And so we have to find ways to offset this labor challenge, especially to take on the growth that we have in the coming years. It’s time to embrace AI. It’s time to embrace automation, innovation, technology advances. From my perspective, it’s really how can we make this existing workforce more efficient and more productive to handle this future demand that’s coming our way.

So overall, what you’re hearing from me today is yes, there’s some mild decline in manufacturing overall, but it is just that it’s mild and we have growth years coming our way. You’ll start to feel that upward momentum. As we move later into this year, but certainly into 2025. It’s really important that you’re targeting those manufacturing sectors in 2024 that are expected to continue to grow. That’ll help you offset some of the decline in some of the other manufacturing sectors that are going through a bit of pain right now. And we need to continue to find ways to address this labor shortage and make this existing workforce more efficient. That’s going to be a recipe for success when we look at the next five years.

I sure hope you found this information helpful. Please remember to like and subscribe to TrendsTalk wherever you listen to your podcasts, and I look forward to talking to you on the next one. Thanks so much. Take care.