By Dr. Chad Moutray
Dr. Moutray is the chief economist at the National Association of Manufacturers and also serves as the director of the Center for Manufacturing Research at the Manufacturing Institute.
There have been a lot of mixed messages in the economy, and this has provided confusion for manufacturing and other business leaders as they plan for 2024. Demand and production have been challenged significantly, both in the U.S. and globally, and employment growth has been relatively flat in 2023. At the same time, there have also been signs of lingering resilience in the economy, buoyed by continued spending. Indeed, manufacturing is not as weak as advertised. The bottom has not fallen out, and more importantly, there have been very sizable increases in investment in the sector that should pay dividends in 2024 and the moving forward.
With that in mind, I continue to be bullish about manufacturing in the United States, knowing that the sector will emerge from the current struggles with renewed strength. Indeed, that is likely the conversation that we will be having about manufacturing one year from today.
For their part, manufacturers remain challenged, with activity that remains subpar. This can be seen in a number of sentiment surveys, including those from the National Association of Manufacturers, the Institute for Supply Management and others. Despite weaker than desired data, expectations for future activity continue to be positive, albeit at reduced paces, and there are nascent signs that global growth might be stabilizing. That would be welcome news, providing hope for expansion in sales and output over the coming months.
Indeed, fewer manufacturers predict that the U.S. economy will slip into a recession, according to the latest NAM outlook survey, consistent with the view that a “soft landing” might be more possible. Real GDP soared 5.2% at the annual rate in Q3 2023, the best quarterly gain since Q4 2021 and buoyed by consumer, government and inventory spending. Demand is expected to slow moving forward, with real GDP expanding by 2.4% in Q4. Overall, the U.S. economy is expected to grow by 2.5% and 2.0% in 2023 and 2024, respectively. Despite such trends, there continue to be sizable downside risks in the economic outlook.
The top downside risks include geopolitical uncertainties, slowing global growth, monetary policy and higher interest rates, the tightening of credit conditions and the persistent discussion that a recession is inevitable. The upside potential in the economy hinges on labor market strength, with continuingly solid wage growth. This is the key in any “soft landing” scenario. There will also continue to be strong tailwinds from spending on infrastructure and increased investments in the U.S., helping to moderate negative headwinds.
Manufacturers continue to cite an inability to attract and retain talent as their top concern in the NAM outlook survey. Even with signs of cooling in employment data, the labor market remains very tight. While hiring has been sluggish year to date in 2023, manufacturing employment remains just shy of 13 million workers, the most since November 2008, and wage growth for production and nonsupervisory workers continues to be very strong, rising 5% over the past 12 months. In addition, there were 587,000 job openings in the latest figures, continuing to exceed pre-pandemic levels despite notable moderation over the past year. More importantly, the number of job postings remains well above the number of people actively looking for work—a structural challenge that is likely to keep workforce issues top-of-mind for years to come.
While workforce challenges continue to dominate, the NAM outlook survey notes other primary concerns, as well. Of note, more respondents are citing an unfavorable business climate as a challenge, pushing that measure to the highest in seven years on worries about tax and regulatory policies. Supply chain bottlenecks and inflation are less of a concern today than in the past two years but remain a major challenge for some firms.
Regarding monetary policy, which will be closely watched in 2024, the Federal Open Market Committee is likely to keep short-term interest rates unchanged over the next few meetings. The current federal funds rate range remained at 5.25% to 5.50%, continuing to be the highest in 22 years. Despite signs of recent moderation in inflation, the Federal Reserve continues to worry about higher-than-desired pricing pressures. As such, the FOMC is likely to keep interest rates elevated for the foreseeable future, with a cut not likely until mid to late 2024.
In conclusion, the economy continues to be challenging, and there are signs that demand has slowed, particularly following the robust growth seen in Q3. The outlook remains uncertain, with more downside risks than upside risks. And yet, it is not all bad news. There has been a surprising resilience in the economy, with a solid labor market and wage growth helping to fuel spending, and the prospects of a “soft landing” remain very possible. Indeed, even amid the current weaknesses in manufacturing production and demand, there are signs that activity might be stabilizing somewhat, providing “green shoots” of optimism for a rebound at some point in 2024. In addition, sizable investments in the sector offer glimpses of stronger manufacturing growth over the coming years—certainly a reason to be bullish about manufacturing moving forward.
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