BUSINESS

Manufacturing Outlook 2023: Is a Contraction Coming?

Hugh Grant

Economists, traders, and the news media have been beating the drum about a forthcoming recession since early 2022. Stock and bond markets have taken this sentiment to heart, producing one of the worst years for equities and fixed-income securities since 2000. 

Sure, the old cliche that “the market has correctly predicted nine of the past five recessions” hasn’t proven wrong yet. But the smart money is betting that this time is different and that we’re actually going to see an economic contraction. And the nature of the expected recession — characterized by high interest rates and a very tight labor market at the outset — could be particularly problematic for the United States’ unsteady manufacturing economy.

Here’s why smart observers expect a proper recession in 2023 and what it could mean for U.S. manufacturers.

Why Do People Think a Recession Is Coming?

The signs of a looming broad-based economic recession mounted throughout 2022. By the end of the year, they included:

  • Slowing U.S. GDP growth, including two quarters of nominally negative year-over-year growth
  • Marked declines in the pace of job creation, which is often a lagging indicator of recession
  • Aggressive interest rate hikes by the Federal Reserve Bank — members of the bank’s rate-setting board have said repeatedly that their number one priority is getting inflation under control, implying (though leaving unspoken) that they’re willing to cause a recession in the process
  • Sharp downturns in the U.S. real estate market, especially in office and residential, with corresponding declines in lending activity
  • Historically poor bond and stock market performance year-over-year, suggesting investors are retrenching ahead of expected bad times
  • Worrisome technical activity in the bond market, including multiple yield curve inversions (historically suggestive of recession in the near term)
  • Slowing corporate merger activity, despite some high-profile combinations in 2021 and early 2022

None of this adds up to conclusive proof that a recession is definitely coming in 2023. But weakness is already apparent in some sectors of the economy and history tells us it’s likelier than not that this weakness will spread.

Here’s what it could mean for the manufacturing industry.

What to Expect From a Manufacturing Recession in 2023

Whether we see a technical recession or not, the manufacturing industry will face a number of significant challenges in 2023. Some are continuations of long-running trends, while others are relatively new threats:

  • Persistently high interest rates will curtail manufacturing investment
  • Weakening demand for durable consumer goods, including passenger vehicles and home appliances, will disproportionately affect cyclical manufacturers
  • Business equipment orders will decline as the construction sector contractors and other manufacturers pull back
  • The “mini-onshoring” trend seen since early in the pandemic will pause as China reopens and adopts a “whatever it takes” approach to supporting its domestic manufacturing sector

One bit of good news for manufacturers in all this is that the supply chain, which is already back to near-normal after experiencing historic bottlenecks in 2021 and early 2022, will continue to normalize. That should further reduce cargo rates for U.S. exporters and reduce time to market.

Preparing for the Worst: What Manufacturing Leaders Can Do Now

This won’t be the first U.S. manufacturing downturn. It won’t be the last. Prior downturns tell us that manufacturing leaders can do five things to prepare for the sort of drawdown we expect:

  • Take advantage of temporary interest rate declines to refinance higher-interest property and equipment loans
  • Preemptively idle some capacity
  • Delay fleet and/or equipment replacement cycles in anticipation of lower interest rates in 2024
  • Pull back on hiring bonuses and focus on retaining existing employees (which tends to be cheaper than hiring new)
  • Renegotiate contracts and leases as needed (and be prepared to find other vendors where possible)

Room for Disagreement?

One thing seems certain: If a recession does arrive as forecast in 2023, it won’t come as a surprise to anyone paying attention.

Economists, business leaders, hobbyists interested in finance and the economy. A few eternal optimists notwithstanding, they’re united in the belief that we’re going to experience a downturn soon.

Mountains of evidence support their view, and economic consensus views are often self-fulfilling prophecies. No one wants to be the last guest at the party. 

Nevertheless, the degree of collective certainty around the idea of a recession in 2023 should give us pause. History shows us that markets are susceptible to herd mentality, and that participants willing to go against the grain frequently do well for themselves. This isn’t to say we should expect the unexpected in 2023 — just that events can and do have a way of surprising.