Last updated on July 1st, 2019 at 03:55 pm
Nearly two-thirds of manufacturers are preparing their businesses for a possible recession, but just 27% of firms expect one to occur in the next 12 months, according to a survey by Chicago-based advisory firm Sikich LLP.
Among the 63% of companies taking steps to prepare for a downturn, the most common actions included increasing production efficiency, increasing the ability to quickly scale operations up or down and exploring new geographic markets.
The survey, conducted in April, garnered online responses from 310 companies. Around 94% of the respondents were based in the U.S., including 12% each in Wisconsin, Illinois and Ohio.
While the survey found just 27% of respondents said a recession is extremely or very likely in the next 12 months, there was a significant gap in the outlook between small and large firms. Just 21% of those with less than $500 million in annual revenue expect a recession while 49% of those above that threshold expect a downturn. Larger firms made up 21% of the survey sample.
Jerry Murphy, partner-in-charge for Sikich’s manufacturing and distribution services, said larger companies typically have more visibility into their future demand and also have more global exposure.
“They don’t often share that kind of visibility with their smaller suppliers, so the small and medium-sized businesses may not be learning of this slowdown or this pipeline as quickly,” Murphy said. “It’s not uncommon for them to learn about it rather quickly or abruptly.”
Regardless of size, Murphy said preparations for a recession are likely the result of a long economic expansion that executives expect will have to end at some point and memories of the last sharp downturn.
“The pain of 2008 and the Great Recession is still pretty vivid in most business owners and management teams and they learned a great deal from that experience,” Murphy said. “Preparation for an eventual slowdown, they know how to do (that) effectively and they’re taking steps so they don’t get caught off guard.”
At least one local measure has shown signs of a potential slowdown as well. The Milwaukee-area PMI, part of the Marquette-ISM Report on Manufacturing, dipped to 47.83 in May. Any reading below 50 indicates the manufacturing sector in the region is contracting. The index has been trending down for most of the last year. The similar but separate national ISM index has also been trending downward in recent months.
Executives in the Sikich survey were split on the potential impact of trade disputes and negotiations involving the U.S. and China, Canada, Mexico and other countries.
A plurality of executives, 38%, said the trade developments would have a positive impact on their business while 35% expected a negative impact.
Executives at larger companies and those with operations outside the U.S. were both more likely than smaller firms and those with only domestic operations to expect a positive impact. Just 25% of companies with no foreign operations expect a positive impact from trade talks.
Murphy acknowledged some companies may quietly benefit from the tariffs but said business owners and management teams are starting to become a little more concerned about the length of time it has taken to reach a deal on trade with China.
He said companies importing from China have seen a significant amount of erosion in their profit margin and will begin looking at moving to alternative sources if the tariffs stay in place.
“They did a lot of buying prior to some of the more drastic tariffs,” Murphy said. “I know clients were doing everything they could to get as much product into the United States or at least on the water to avoid the tariffs or the higher tariffs.”
He added that while inflation has remained relatively low, it could begin to move higher as the trade dispute drags on.
“I think that consumers will begin to see some of that passed on to them. We probably haven’t been in this economic cycle with the trade tensions or tariff long enough to maybe necessarily see the impact on the costs of goods,” Murphy said.