Dec 03, 2021

Economic Outlook Anchors PICPA’s Inaugural Manufacturing Conference

William HayesBy William J. Hayes, PICPA administrator of content and partnerships

PICPA’s first-ever Manufacturing Conference is Dec. 14 , and Malcolm Polley, president and chief investment officer for Stewart Capital Advisors LLC in Indiana, Pa., will be there to provide an economic outlook for 2022. In advance of his session, Polley sat with us for a sneak peek into what is sure to be an enlightening conversation.

Does it look like inflation will present problems for CPAs in the manufacturing industry in 2022?

Malcolm-PolleyWe believe that inflation will continue to run hotter than both past history and Federal Reserve targets would suggest. Continued supply chain issues will probably drag on into 2022, impacting both raw materials and component parts, while demand does not look like it will abate much. Inflation for manufacturers will likely come from all fronts: wage inflation, raw material inflation, etc. This will cause many to take a harder look at automation to create efficiencies around lower-value processes (low skill). The big question continues to be, “Is inflation transitory or is it more sustainable?” We have been in the transitory camp, but also don’t believe that we will see inflation decline to prepandemic levels, expecting it to settle in a range of 3% to 4% annualized.

Discuss the issues with the supply chain for a moment.

The pandemic exposed the problem inherent with just-in-time (JIT) inventories. JIT allowed companies/manufacturers to minimize carried inventories, thereby minimizing working capital tied up in inventories. Unfortunately, supply chains were significantly thinned out as low-value manufacturing was moved to the lowest cost producing areas of the globe (primarily Asia), and this exposed manufacturers to both geographic as well as event risks. Put another way, existing supply chains worked well until they didn’t; and when they didn’t work it took everything down. We believe this means a substantial shift to both reshoring manufacturing as well as a reordering of the supply chain to bring it closer to its use point. This will take time and capital (both monetary and human), which means the current stresses will remain in place for some time.

How about talent? Do you believe it will be easier to find qualified employees in the coming year?

The talent pool issue is really one of demographics. Boomers who had delayed retirement are throwing in the towel and leaving the workforce. Millennials and Gen Z, while currently larger in numbers than boomers, lack the experience boomers have, insist on greater work/life balance than boomers did at their age, and, by comparison, actually are a smaller percentage of the working-age population than the boomers were at the same point in their history. This was already creating talent pool issues. The pandemic exacerbated the problems as closed/virtual schools and reduced daycare options have meant that at least one parent probably withdrew from the workforce to be a caregiver. This task had historically fallen on women, and it appears the pandemic did nothing to change that tendency as women have not returned to the workforce at the same level as men. Higher salaries and sign-on bonuses meant to lure talent back into the workforce have helped push the quit rate to its highest level this century, both in terms of numbers of voluntary quits (4.27 million) and as a percentage (2.9%) of the labor force. We expect that the difficulty that employers are having in finding and retaining employees, let alone qualified employees, will remain high for the foreseeable future.

What are the chances of a recession in 2022?

We view the probability of recession in 2022 as low. We expect demand both at the consumer and the producer levels to remain high as bottlenecks in the supply chain will likely persist into 2022. That said, we do expect GDP growth to slow significantly from 2021 levels of – particularly from the first half of the year. This is simply Keynesian slowing as the levels of stimulus won’t be maintained at pandemic levels. This breaking will happen both at the monetary policy level as the Fed tapers its purchases of bonds in the open market and on the fiscal policy front as the federal government wrangles with how much additional spending will get through Congress. As of mid-November, the likelihood is that additional government investment has been substantially reduced from the initially proposed $3.5 trillion. Once we get into 2022, with mid-term elections looming, the likelihood of a significant spending bill, or bills, is greatly reduced.

Hear more from Malcolm Polley at the 2021 PICPA Manufacturing Conference on Dec. 14. Be sure to sign up today.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.