February 17, 2023

Hello, welcome to this edition of TrendsTalk. I’m Brian Beaulieu, CEO and Chief Economist of ITR Economics. Today we’re going to spend a few minutes talking about US Total Manufacturing, it’s a series compiled by the Federal Reserve Board, and we finished up the year in good shape. Manufacturing stayed strong as we thought it would through 2022, but there’s been a recent development in that of late the 112 rate of change, which compares the latest monthly dated to one year ago, it slipped into negative territory, which means latest month came in slightly below one year ago.

And normally we would chalk that up to noise, but given everything going on in the leading indicators, the fact that they are still declining in the very high interest rate environment that we had to contend with, we thought we’d take a look at that a little bit more closely.

It looks like from our perspective that the first quarter of 2023 will come in 0.7% below the first quarter of 2022, so a very mild decline year over year, but it’s coming a little bit sooner than we thought it would, so therefore we want to let you know about it. The second quarter is expected to come in again essentially even with the second quarter of last year down 0.6%. That’s not really something anybody would notice.

So for most businesses, if they run with US Total Manufacturing as published by the Fed, then what they’re going to feel is the businesses flat year over year. But we get a little bit more pronounced weakness in the second half of the year, with the year as a whole 2023 coming in at minus 1.1% relative to 2022. Again, a very, very mild decline, but if you’re budgeting for ongoing expansion it could put a hole in some of your plans, certainly could ruin your budget in terms of profitability.

It gets a little bit tighter in 2024, particularly in the first half of the year. We think that higher interest rates, slowing consumerism, begin to bite in 2024. It’s probably over with by the end of the third quarter of 2024. And the year as a whole, this isn’t going to be that much different than 2023 at a minus 1.7% decline. And from peak to trough we have the data trend, that 12 month moving average, declining 2.3%, which is milder than normal. Oh, it’s a little bit more severe than what we experienced in ’15, ’16, that particular recession, but again, that was one that was not bad to contend with.

The point of this is when it’s that mild there are things you can do about it. You have your backlog, what we’re seeing is backlogs are being eroded, they’re being normalized really is where we’re going to. Supply chains improved, demand slackens a little bit, we’re going through our backlog. And without those leading indicators having turned around we don’t really have a solid reason for thinking it’s going to turn up in the first half of 2024, particularly with interest rates continuing to be a problem.

We’re coming out with a new release called Fed Watch and keep an eye on that on our website. Also, it’s where we’re going to be taking a more in-depth view, episodically looking at what’s going on with the interest rates, with the inflation rate, but for now it’s clearly impacting our ability to manufacture, not our desire, but our ability.

There’s some good news in that in that the labor pressure should be abating somewhat. You won’t be giving out the same magnitude raises in 2023 or ’24 that you did in 2022. Just watch the inventories, watch the throughput, and continue to make money and look for some new opportunities if you can at all find them. If you’re in the position where you can go to markets where you haven’t been before this is a great time to figure out how to do that for 2024.

This is Brian Beaulieu with this edition of TrendsTalk. Thanks for listening.