At the National Fluid Power Association’s 2024 Industry & Economic Outlook Conference, Alan Beaulieu, consulting principal for ITR Economics, outlined several challenges facing manufacturers for the foreseeable future. These include rising costs for inputs, electricity, and labor, which will likely continue to pressure profit margins across the sector.
Beaulieu encouraged attendees to seize the current opportunity to borrow and invest in efficiency improvements. “You’ll want to position your business to stay ahead of escalating costs related to the producer price index, labor, and electricity,” he advised. “Making your operations as efficient as possible will help you stay profitable even as these expenses increase.”
Just weeks after the conference, the U.S. Federal Reserve took a significant step, cutting its policy interest rate by 50 basis points—twice the typical increment. This move, characterized by many as unusually aggressive, has prompted economists like Lauren Saidel-Baker from ITR Economics to weigh in on the broader implications for the manufacturing industry.
Fed’s Shift in Focus
Saidel-Baker explained that the Fed’s substantial rate cut was a reaction to its dual mandate of balancing price stability with full employment. The central bank had previously raised rates to combat inflation, which was particularly pronounced early in the pandemic. “The Fed underestimated inflation at that time, thinking it would be temporary,” she noted. “Instead, inflation peaked in 2022, leading to sustained high rates.”
Now, with inflation nearing the Fed’s 2% target, the focus has shifted. “The Fed sees inflation moving in the right direction,” she explained. “We believe disinflation will continue throughout the year, but labor market weaknesses are emerging, so the Fed has begun to cut rates.”
Labor Market Concerns
While price inflation for goods has been controlled, Saidel-Baker highlighted the persistently high inflation in services, which remains a significant challenge. “We may see some relief in 2024,” she said, “but long-term demographic shifts are a concern. Generation Z is smaller than the millennial generation, and they’re entering the workforce just as the baby boomers are retiring. There simply aren’t enough workers to replace them.”
Additionally, the prime-age labor force participation rate is at a two-decade high, leaving few available workers to fill open positions. Saidel-Baker stressed that these demographic pressures will likely keep labor market challenges at the forefront for manufacturers and could impact productivity and costs moving forward.
In the wake of the Fed’s decision, manufacturers will need to carefully evaluate their borrowing and investment strategies. The new rate cut may provide a brief window of opportunity to finance efficiency-enhancing technologies, a step that could help businesses weather the ongoing pressures of input and labor cost inflation.
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