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Stalled by High Interest Rates:

A Look at the Struggles of the Manufacturing Industry

BY KHIZER HAYAT

4 MINUTE READ

After two years of high interest rates and a challenging macroeconomic climate, the manufacturing industry has started to feel the pain of decreased demand for products such as cars and homes due to the high cost of borrowing for consumers. According to the Institute for Supply Management’s May Manufacturing PMI Report, the manufacturing industry has seen a plateau in its growth as the Federal Reserve maintains high interest rates. This comes after a positive start to the year, which showed promising signs of a rebound for the industry. The stagnant growth can be attributed to a lack of demand, with companies being reluctant to invest in new orders or capacity until interest rates are lowered.

ISM's May Purchasing Managers' Index

The Institute for Supply Management's (ISM) is the oldest, and the largest, supply management association in the world. Founded in 1915, the U.S.-based not-for-profit educational association serves professionals and organizations with a keen interest in supply management, providing them education, training, qualifications, publications, information, and research.
The ISM’s May Purchasing Managers' Index (PMI) registered at 48.7% in May, a slight decrease from April and still below the 50.0 mark, indicating contraction. This stagnant growth is largely driven by weak demand, as evidenced by the new orders index, which fell by 3.7 percentage points to 45.4%.
“Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions.” said Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee. He further added: “Interest rate uncertainty has caused companies to focus more on liquidity and be extremely cautious with any form of investment, including people, inventory/working capital and Capex.”
A higher focus on liquidity and aversion to investment would cause manufacturers in the US to struggle with increasing productivity as investment in technology typically boosts productivity. This would then put US manufacturers on the backfoot compared to their international peers who have the capability to invest heavily in their manufacturing operations to improve productivity. For example, China's fixed-asset investment, a pivotal growth driver, grew at a faster-than-anticipated clip in the first quarter amid a big bet on manufacturing and high-tech sectors.

Backlogs and Employment

With demand down, backlogs are also falling, currently at 42.4%. Fiore cautioned that without a change in interest rates, the industry could sink back into contraction, especially if production continues to fall. Although employment was up in May compared to April, Fiore noted that this does not indicate major hiring when considered alongside the stagnant growth and lack of orders.

Interest Rate Outlook

The Federal Reserve has stated that it does not plan to reduce rates until there is “greater confidence that inflation is moving sustainably toward 2 percent." Industry observers predict that rate cuts are unlikely to happen until the fourth quarter of 2024.
This could cause further issues for manufacturers who are already facing demand issues. Further drop in demand could result in higher unemployment in the manufacturing sector, potentially resulting in a downturn for the entire sector.

AI integration as a solution to demand problems

Although a technology investment might seem counter intuitive in a challenging macro economic environment, it has been proven to help manufacturers increase revenue while minimizing costs. AI platforms, such as i-5O’s, computer vision system allow manufacturers to track their production processes in real-time and respond to production problems with minimal delay to avoid unnecessary downtime. i-5O's clients have reported increased throughout, reduced downtime, and improved efficiency in their production processes by using i-5O’s computer vision platform. Manufacturers facing demand problems need to extract as much as possible from their resources and i-5O’s computer vision systems provides them with real-time data to maximize their production capacity with limited resources.

Challenges ahead but things are getting better

Despite the gloomy outlook from ISM, S&P Global’s PMI showed more positive results, with a reading of 51.3 in May, indicating expansion. This was driven by renewed export orders and optimism about future production rates. While manufacturers noted a rise in input costs , there is a sense of confidence in the industry, with some believing that the expansion in new work will lead to increased production in the coming months.
However, until there is a change in interest rates, the manufacturing industry may continue to face challenges and uncertainty. By leveraging the power of i-5O's computer vision platform, manufacturers can gain valuable insights, improve efficiency, and make more informed decisions to overcome these demand challenges.

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