A prominent CEO reveals what manufacturers can do to mitigate the effects of the economic slowdown that is already here.
December 3, 2019
For manufacturers, the talk about whether the United States economy is headed for a recession is moot. Whether or not economic realities meet the technical definition of a recession, one thing is clear: the manufacturing sector is already experiencing contraction.
Manufacturing output in the U.S. is down 0.9 percent in the past year, according to the Census Bureau. Industrial production in October fell 0.1 percent month-over-month and 0.6 percent year-over-year even after subtracting the effects of the General Motors strike. Export orders sank to a ten-year low recently and new manufacturing orders stand at a seven-year low. Even metals manufacturers, which enjoyed an early bump thanks to President Donald Trump’s protective tariffs, have headed for a downturn. These and other numbers, such as the plunging ISM manufacturing index and the negative values posted by the Cass Shipments Index, lead analysts to assert that U.S. GDP growth may hover around zero during the fourth quarter of 2019 and the first quarter of 2020.
But here is another indicator that isn’t discussed much, as if more convincing is needed. “We are starting to see claims increase significantly in the U.S. in terms of volume and value,” James Daly, CEO Euler Hermes North America, told Industry Today in an exclusive interview. “Claims are accelerating in a way not seen since the recession of 2008 and 2009.”
Euler Hermes is in the business of providing trade credit insurance and has many small and mid-sized U.S. manufacturers among its client base. When they pay out claims, it means that manufacturers’ customers are not paying their bills or have gone insolvent.
“Our product is an early warning signal of a slowdown,” Daly asserted. “Some components of the manufacturing sector are starting to slow down at a much quicker rate than the overall economy. We’re
seeing the biggest impact at the moment in logistics and construction. Many companies supplying the construction sector are having problems.”
There are a few silver linings to this bleak scenario, according to Daly. One is that consumer spending, which represents 70 percent of the economy, is still going strong. But even there, “Things are drifting the wrong way in terms of income and spending,” he said.
The economy is likely to hit bottom in the first quarter of 2020 and then start to recover, in part because of the approaching election, which tends to generate economic optimism, at least among consumers. Still, Euler Hermes economists expect the U.S. economy to bump along in slow-growth mode for another 18 months.
The question then becomes what should U.S. manufacturers do to get through the next couple of quarters and beyond. “My advice is to start to develop a cash management process,” said Daly. “We find that smaller manufacturers are not as sophisticated in that area. For larger and more sophisticated manufacturers, it’s their bread and butter.
“If you haven’t got the cash cycle really well managed,” Daly added, “you will find that you will have shortfalls and may not be able to make payroll, interest payment on loans, or pay suppliers. Most medium sized and small companies in the U.S. fail because their cash flow has gone negative and they can’t meet their commitments.”
Daly recommends that companies stress test their cash management cycle, which means gaming out how cash flow will be affected if they lose, say, five percent or 20 percent or their income. Another item to look at is inventory management.
“Look at how you manage inventory against the cash cycle,” Daly explained. “It’s possible you’re carrying too much and the cost of inventory may be climbing” even as sales dip.
“The banking sector is pretty liquid at the moment,” said Daly, allowing companies potentially favorable conditions to negotiate working capital facilities if those are required for cash infusions. “Start negotiating with your banks now,” Daly advised. “Try to push out maturities on working capital facilities for a couple of years.”
At the macroeconomic level, the best thing that can happen for U.S. manufacturers is an end to the U.S.-China tariff feud. “Tariffs are not good for manufacturing as a whole,” said Daly. “They create much more losers than winners.”
On the other hand, Daly believes that “tariffs are effective at bringing parties to the negotiating table,” and, in fact, he believes that the U.S. and China will reach an agreement on tariffs in the not too distant future.
“One way to generate economic growth,” Daly concluded, “is to remove the uncertainty that surrounds all the tariffs.”
Peter Buxbaum, a columnist for Industry Today, is an experienced author of articles on business, technology, international trade, transportation, security, and legal issues. His work has appeared in Fortune, Chief Executive, Jane’s Defence Weekly and Computerworld.