If a recession is coming, manufacturers want to face it head on

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It was not long ago that manufacturers in southeastern Wisconsin were riding high. Boosted by tax cuts and a generally strong economy, the Marquette-ISM Report on Manufacturing posted its highest reading since at least the start of 2014 at 75.24 in February 2018.

Any reading above 50 for the index indicates growth in the sector and that month’s report was full of positive readings. New orders, production, employment, backlog and exports were all growing. Nearly three-quarters of respondents expected conditions to improve in the next six months.

Still, the report also had some warning signs. Respondents cautioned that tariffs on steel and aluminum could cause price increases over the long-term. They also fretted over inconsistent customer demand, shortages of trucks and labor and growing lead times for electronic components.

In the 18 months since that high-water mark, the region’s monthly index has been down more times – 10 in total – than it has been up. The trend has been worse than that. The six-month average of the index has been down in all but two months, and in three of the past four months the index has been below 50, an indication the sector is contracting.

With declining sentiment, continuing global trade tensions and slowing international markets, it would be easy to think manufacturers are staring down the barrel of their biggest economic downturn since the Great Recession.

But while there are certainly challenges and signs of a slowdown, the current market might be better described as one of cautious optimism for manufacturers, particularly for the small and medium-sized companies that make up a large portion of Wisconsin’s firms.

“Overall, the middle-market seems to be holding its own,” said Jerry Murphy, partner-in-charge of the manufacturing and distribution practice at Illinois-based advisory firm Sikich, which has clients throughout Wisconsin.

Murphy said Sikich’s clients have not verbalized concerns about a recession and they generally seem to be feeling good about the economy. He cautioned that smaller firms may not have the same visibility into future economic activity that large multi-national companies do.

Kelly Rudy, president of The Paranet Group, a Wauwatosa-based professional development membership company that works with manufacturers, said her sense is that manufacturers expect to see a recession at some point, but do not anticipate it will be severe.

“Most people agree there is going to be some minor downfall,” she said.

Nate Hoffman, president of Waukesha-based operational efficiency firm Carrus Group, said given the level of activity in recent years, some amount of slowdown might have been expected.

“It’s plateaued, but the level of the plateau is still very, very high,” he said. “People are still very, very growth-minded.”

Whether a recession is imminent or years away, the ups and downs of economic cycles suggest one will arrive at some point. The question for manufacturers is how best to prepare for a potential downturn.

Murphy suggested starting at the top line of the business.

“Obviously sales is your lifeline or your oxygen. It creates the cash flow needed to run your business, so I think a lot of folks are really trying to focus on making sure they have a good steady stream of sales,” he said.

With many manufacturers experiencing strong orders within the past few years, Murphy cautioned that it is easy “to take your eye off the ball.”

“The sales are robust and you don’t always focus on your sales and marketing efforts and diversification of customers,” he said.

Rudy said for some companies it may make sense to pursue product and market diversification, but for others that is difficult to do and it might make more sense to go after market share. She said companies need to do what is smart for them while still taking on some risk.

“You can’t be completely risk averse. If you’re completely risk averse you’re not going to succeed,” she said. “Status quo is not good enough because there are other people out there who are not staying at status quo.”

Beyond diversifying or seeking market share, Hoffmann said it is a good time for companies to address their challenges and bottlenecks, things like plant layout, dated equipment or repeated processes.

“It’s time to get your house in order,” he said. “All of that stuff is going to become a heavy backpack in a downturn.”

Rudy said many companies seem to be holding off on large capital expenditures.

“If people are investing in their company, they’re really investing in some low-cost initiatives to find areas of waste and continuous improvement so they can get more capacity out of what they have,” she said.

Murphy said clients that are expanding or making significant investments are doing it when they have certainty about the customer demand to utilize, and pay for, those expansions.

“It’s sometimes a lot to bite off, but they know that having that additional business will be beneficial to them when there is some sort of a change in economic conditions or a customer experiences a slowdown,” Murphy said.

He acknowledged those bringing on new business need to also work hard to continue meeting the expectations of their current customers.

“They’re willing to go through some pain in taking on additional work to help weather a storm,” Murphy said. “It’s a mindset that business owners have been taking on since we came out of the Great Recession to make sure they don’t experience the same hardship they did in ‘08 and ‘09.” 

Rudy and Murphy both also pointed to a need for manufacturers to manage their inventory, although Murphy noted that companies have to work together to keep components and products available.

Source: Marquette-ISM Report on Manufacturing

“There has to be a healthy mix of material throughout the supply chain,” he said.

Many businesses have also been very intentional about limiting the amount of debt they carry, Murphy said. He and Rudy both noted businesses are seeking to build up cash reserves.

Having ready access to cash serves two purposes, they said. It provides a buffer in the event that orders slow in a downturn and also makes it possible to act quickly on investment opportunities during or after a slowdown.

Economic cycles come and go and being prepared for a recession’s aftermath might be as important as being ready heading into one. To that end, many manufacturers have worked extremely hard in recent years to attract and retain new employees.

“The common opinion seems to be that this (recession) is not going to be that long,” Rudy said. “They definitely don’t want to do layoffs. They are going to do everything they can to protect against doing that because really, long term, they are going to be screwed after the recession (if they do).”

She pointed out a brief downturn could be shorter than the time it takes for a company to hire and onboard a new employee.

Rudy said that in the Great Recession, many companies were paralyzed and caught flat-footed by the downturn. This time around, she said it seems like companies view it as a business challenge that they are not afraid to take head-on.

“It just feels like people are grabbing the bull by the horns,” she said.

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Arthur Thomas
Arthur covers manufacturing for BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.