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What Sectors of Manufacturing Will Remain Strong Over the Next 18 Months?

July 21, 2022

The risk of recession, followed closely by inflation fears, is the top concern among corporate CEOs and CFOs, according to recent surveys. Concerns about whether a recession will be a short or prolonged one and the timing is top of mind for many executives. Not all industries will suffer during a softening in the macroeconomic environment.

The US manufacturing sector has shown a tremendous amount of resilience in the past four years, weathering global supply chain challenges and trends pushing manufacturing activity closer to consumption (reshoring). So, which elements of manufacturing could get through a potential recession without too much deceleration?

Background

Let’s flash back to the trade wars in 2018, which started a wave of supply chain challenges. Since then, there’s been continued sourcing uncertainty. The pandemic, Brexit, war in Ukraine, China hosting of the Olympics (which disrupted manufacturing output), and more have impacted throughput around the world over the past four years. Sourcing managers have been forced to rethink their global sourcing strategies.

Those challenges have led to business inventories still remaining 9.2% lower than they were prior to the pandemic, despite some recent improvements in inventory levels in retail, wholesale trade, and some sectors of manufacturing.

Staving Off Recessionary Headwinds

Construction in the manufacturing sector is up 33.9% year-over-year and was moving at an annual pace of $96 billion worth of construction put in place. This is the highest level of manufacturing construction spending in history (some of this would be inflation impacted). The US is rapidly expanding the volume of manufacturing that can take place across the country. This could help the sector grow despite recessionary headwinds.

Forecasts for industrial production in the US are showing some mixed news. Advanced analytical models covering the primary durable goods sectors show some industries will still exceed or perform at parity against pre-recession levels. This would almost suggest a period of “normalization” coming.

What’s to Come

Using sources of forecasts for manufacturing over the next 18 months, there are three categories manufacturing will go through when compared to the pre-pandemic period: growing, flattening, and contracting. These are projections. The forecasts have shown an accuracy rate above 95% over the past 6 months, but as the regression models get further out the accuracy declines.

  • Growing:
    • Aerospace – building faster momentum in early 2023
    • Computers and electronic products – faster momentum by Q2 ‘23
      • Robotics and products used to automate business operations will be in high demand, especially when going into a slowdown period. Companies have shown an interest in improving productivity without increasing headcount.
    • Motor vehicles and parts – models show acceleration throughout the next 18 months with no recessive risks
    • Any consumer staples – FMCG (Fast Moving Consumer Goods – necessities  including items like food, health and personal care products, basic household repair items, etc.)
    • Energy and utilities production
  • Flattening:
    • Fabricated metal products – deceleration through Dec ’22, recovery starting in Q3 ‘23
    • Machinery – the sector remains strong and elevated until Q2 ’23, then hits official contraction by summer of ’23 based on current outlooks
    • Sporting goods, furniture, seasonal merchandise, home improvement items
  • Contracting:
    • Electrical equipment and appliances – current models are showing a slow contraction throughout the next 18 months
    • Primary metal manufacturing – this is a volatile sector, but it shows contraction through Q2 of ’23 before accelerating sharply in the second half of the year

There are opportunities for growth even during an economic slowing period, one just has to hunt for them. The manufacturing and distribution team at MarksNelson is well versed in helping companies implement solutions intended to minimize tax burdens, increase cash flow, and maximize operational efficiencies. Reach out today.

About THE AUTHOR

Shari has deep experience in financial reporting of income taxes and works closely with our business clients, their owners, and key executives to minimize risks in business income tax reporting and compliance. She is skilled at supporting clients with corporate income tax planning and consulting... >>> READ MORE

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