December 22, 2023

Hi everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this edition of Trends Talk. Today I wanted to discuss manufacturing. We talk a lot about industrial production on this podcast, on the Trends Talks, and we talk a lot about it in our trends report, but I really wanted to isolate the manufacturing component of industrial production. And the reason for that is there’s a little bit of a difference when you look at the overall industrial production series and where it’s at in the economic cycle, versus really isolating that manufacturing component. So let me just take a step back. When we talk US industrial production, about 75% of that data set is manufacturing. The other makeup is mining and utilities. When we think about manufacturing, we can see that manufacturing historically has typically followed industrial production, given it’s the largest component. However, when we look at where the data’s trending here today, as I’d mentioned, there’s a little bit of a nuance.

So if you look at industrial production’s annual growth rate, it’s up 0.4%. It’s been slowing down for quite some time, but the annual growth rate is still positive as I sit here today. However, when you isolate that manufacturing component, you can see that manufacturing’s actually down year over year, -1.1%. So the other components, the mining, oil and gas utilities components of industrial production are what’s keeping that series elevated, given the largest component, which is manufacturing is down already in that Phase D recession. That’s a little bit different from what we’ve seen in past cycles. If you look back to 2015 and 2016, we saw an industrial production downturn, and the overall series declined lower than manufacturing. So that means that mining oil and gas utilities component actually was the reason for more negativity back in 15 and 16. And the same was true when we look at the downturn in 2020.

If you look at the annual growth rate for industrial production, it was lower than manufacturing, which means manufacturing was less of the problem compared to the other components. But those roles are reversed as we sit here today where the overall industrial production series is up when manufacturing is down year over year. So if you’re in the manufacturing space, you might already be feeling the softening demand out there, but it’s not just the demand environment. If we look at inventories, we’ve talked about inventories on previous episodes, in these bloated inventories, in excess inventory situation that we find ourselves in, is the reason for some of that manufacturing decline as well. So there’s really two challenges going on, and it’s both on the supply side and the demand side. And again, a lot of that’s inventories. And so as we look to 2024, we do expect a softening in the industrial production growth rate to pass through the zero line and move into Phase D recession.

We’re pretty much at that point. And that means manufacturing is likely going to continue to get weaker here over the next few quarters. So if you are in the manufacturing space, as we work out this excess inventory situation, as the macro economy declines, many forecasts are for a weaker 2024 or a negative year-over-year growth rate in comparison to 2023. Now, 2024 will be a great time to gain market share. These mild downturns are great times to increase your market penetration, and hopefully outperform some of those negative growth rates we have forecasted for manufacturing and industrial production next year, but expect that demand environment to be weaker. And even though the excess inventory situation is improving, we’re still not at a level yet where we’re not seeing inventory challenges. Now again, I’m highlighting these big major macroeconomic series with industrial production and manufacturing, but our ITR Trends Report does break down manufacturing into much more granular segments.

In the manufacturing module of our Trends Report, there’s an at a glance dashboard, and it shows various manufacturing end markets, and our expectations for 2024. Now, of the 10 plus markets that we have, every single end market other than one is projected for negative annual growth rates in 2024. So this isn’t all encompassing manufacturing downturn, but there are still differences. There are some markets that are less negative than others. For example, if you look at construction machinery, we have that down 14% in 2024 compared to 2023. But conversely, if you look at oil and gas, we only have oil and gas extraction down 0.8% compared to 2023. So even though the downturn is all encompassing, in terms of the manufacturing markets, there are areas that will be less negative, or almost flat next year, that’ll be worth targeting compared to others. And then the one bright spot is aircraft production, which actually lags most of the manufacturing markets, which will still be up.

So that Trends Report manufacturing module as well as our other modules, show these dashboards and really highlight where some of these areas of opportunity are, or areas that will be less negative than others in 2024, and might deserve some more of your attention, your resources as we look at next year. So please take a look at that. Understand, as I had mentioned in the beginning, industrial production’s projected to go negative next year. The manufacturing sub component is already negative as we sit here today. So if you’re feeling some weakness out there, the market is as well, and we clearly see that in the data. But really look for those opportunities. On a more granular level, as we approach 2024, which is largely a down year, look for those segments that’ll be less negative. Look for some of those segments that are either lagging or counter cyclical in 2024 to outperform this macroeconomic downturn.

Just as a heads-up for everyone, we will be posting our future Trends Talk episodes on Monday. You all have been used to seeing these episodes on Friday. We wanted you to start your week with some of this information. So we’ll be publishing new episodes, from this point forward, on Monday. Just wanted to let everyone know. Also, my next episode will be a year in review. We’ll talk a little bit about where we’ve been, where we are as we sit here today at the end of 2023, and where we’re going in 2024. A lot of information to cover there and also a lot of new and exciting things for Trends Talks coming your way in 2024. And we’ll have more information to come. So I hope you found this information helpful. I’m looking forward to checking in with you all next week, and I hope everyone has a great holiday season. Thanks so much.