This year, we’ve been working closely with Dr. Robert Eyler, professor of economics at Sonoma University to develop a series that takes a close look at the economy and gives insights into how it will impact US manufacturers in 2023, 2024, and beyond. First, we released a quarterly benchmark report that sheds light on key economic indicators. Then Dr. Eyler joined us for a webinar where he talked through some of the content in the report in more detail and shared even more great insights.
Dr. Eyler’s webinar contained a LOT of great information—far too much for one quick article. Below you’ll find a few of the most important macro and microeconomic indicators that he shared: why you should pay attention to them, how they fit into an economic forecast, and what it might mean for your business for the next few years.
10-Year Treasury Rate – This is a key forward-looking interest rate. It’s an indicator of how manufacturers (and businesses in general) are thinking about borrowing money in order to grow, buy goods and services, and manufacture goods and services. The 10-year Treasury rate has two functions in our economy. One, it tells the story of how the government is borrowing in the long term and how it’s shaping its own so-called yield curve. The 10-Year rises and falls based on how the government is thinking about financing itself. It’s also a good way to think about how the globe is looking to invest in the United States when it’s looking for safety. Two, it drives mortgage rates by impacting how people are making decisions to purchase homes, how that then leads to construction demand, and how that leads to manufacturing demand for construction products as inputs. So this rate could affect housing similarly to what’s happening in manufacturing, specifically for things that are inputs in construction. But more broadly, it’s also an indicator of how businesses might borrow to grow and ultimately how manufacturers might borrow to grow.
Job Openings in Manufacturing – History suggests that when these data go up, we’re in good shape, and when they fall, we’re starting to see a slowdown in hiring. Between 2020 and 2021, job openings in the sector rose dramatically. Since Q3 of 2022, the number of openings has dropped by 300,000 (33%), but that data might not be as alarming as it might seem on its surface. The critical question is: Does the drop reflect a lack of desire to hire? Or are there ghost positions that are being weeded out? Economists are constantly chasing this number, because most employers are not willing to reveal whether or not those are ghost positions.
U2 Unemployment Rate – This indicator is a good forecaster of the economy because it sheds light on how long job losers are remaining unemployed. If the number of people out of work for 16 weeks or more is shrinking, then we deduce that these folks are getting picked back up for jobs. If more and more people are experiencing at least 16 weeks of job loss, we can assume there are fewer jobs available. As of now, this data does not tell the story that the labor market is in trouble.
GDP After Inflation – GDP is obviously a huge concern to anyone in manufacturing, and some recent forecasts have been somewhat grim, but Dr. Eyler’s forecast paints a different picture. Using data and forecasts from the Federal Reserve, Fannie Mae and Freddie Mac, and other forecasts, Dr. Eyler foresees the US will not see a negative GDP After Inflation in the next three years. Some macroeconomists see the possibility of a “soft landing.” In this scenario, inflation lowers, the number of job losses will be enough to initiate rate drops without dragging down the economy, and things get back to “normal” or pre-pandemic growth.
New orders data are part of understanding where the economy is going over the next few years. Macroeconomists tend to look toward new orders in manufacturing as a forecasting tool and as a leading indicator of the economy. It’s a gauge of whether or not businesses are ordering from manufacturers.
Shipments generally have a similar movement to new orders, and that’s what current data reflects. If you have a new order for manufacturing, you’re going to ship it, get paid, and keep on moving. Shipment data generally lags behind new orders by 30 or 60 days.
Manufacturing inventories that are managed well shouldn’t change very much over time, other than normal ups and downs. Inventory levels jumped up during the pandemic, and it appears they have now peaked and are slowly falling again, which suggests that some of the inventory is being used up.
Now what?
Don’t fixate on the idea of whether or not there will be a declared recession. Ask whether or not businesses and consumers are acting like they’re expecting a slower economy. Are they slowing down spending? Are they slowing down new orders for manufacturing? Are they slowing down on the government side? Is there a slowdown in new orders? Those are the kind of things that are going to make for a really slow slog regardless of the indicators and the declaration of a recession in a technical sense. The indicators in some cases suggest at least the next six quarters are going to be slow but not necessarily recessionary.
This quick review is just the tip of the iceberg. Dr. Eyler’s presentation is full of critical information and direction for navigating the economy over the next few years. He uses these data sets along with SourceDay’s own data to build an outlook on the economy that might not be as bleak as you might imagine. There are opportunities for manufacturers to get ahead with the right insights and strategies.
Learn much more by watching Dr. Eyler’s presentation here, or by downloading the inaugural State of the Economy For US Manufacturers economic outlook report.
