Business Outlook at Historical Levels, Certain Challenges Continue

Amid a tremendous amount of political activity in Washington, D.C., the National Association of Manufacturers (NAM) Board of Directors held its semiannual meetings on September 27 and 28. Chinese tariff concerns, uncertainty related to finalizing a new trade deal with Canada and Mexico, the ongoing U.S. Supreme Court justice nomination hearings, Iran and North Korea situations and the looming midterm elections had Washington, D.C., buzzing with activity.

Here are highlights of certain key topics discussed at the NAM meetings: 

Manufacturers’ Sentiment & Outlook

Despite various challenges that will be discussed below, NAM’s 2018 Second-Quarter Manufacturers’ Outlook Survey showed manufacturers’ outlook for their businesses are at the highest levels in the 20-year history of the survey. Approximately 95 percent of survey respondents indicated they have a positive outlook for the future of their companies. This sentiment was evident during the board meetings.

This positive outlook is consistent with current economic trends. The U.S. economy grew at an annualized rate of 4.2 percent gross domestic product (GDP) in the second quarter of 2018, which is the best growth recorded since 2014. It’s anticipated that GDP will be approximately 3 percent for the full year in 2018, which would be the highest annual growth rate since 2005.

Other positive indicators include increases in personal spending, increases in consumer confidence, increases in new durable goods orders and increased housing starts. In fact, results have been positive enough to provide the Federal Reserve with the foundation to continue increasing short-term interest rates, which it did for the third time in 2018 at its September meetings.

Skilled Labor Needs & Unemployment Levels

Unemployment rates are at the lowest levels they have been in decades. While this is a positive result of growth, manufacturers continue to have difficulties finding skilled laborers. This has seemed to dampen or hold back growth for manufacturers. This also is causing rising wages. Many companies are seeking alternative methods of attracting workforce assistance, including partnerships with technical/trade schools and local high schools.

Transition & Succession Concerns

While profits seem to be on the increase for most members, business valuations also appear to be on the rise. As a result, more owners are considering exit strategies earlier than ever before. In particular, the Small and Medium Manufacturers’ Group held a separate breakout session to discuss such strategies. It’s evident unsolicited offers are being made to owners and, in many cases, this is raising the level of awareness of the potential benefits of selling one’s business. The consensus of the breakout session was that many options exist when considering exit strategies, but that you can never start planning too soon.

Health Care Costs

The majority of members have indicated health care costs are increasing, with many noting significant increases. Certain members also noted that insurers have recently been homing in on certain high-risk employees and exempting them out of aggregate stop loss-limits, causing companies to be fully self-insured for related claims for these employees. Various items were discussed around wellness programs, self-insurance alternatives and screening of brokers, insurers and consultants.

Increasing Material Costs

As already discussed, there continue to be concerns over rising costs of materials. While costs have already been increasing, the potential for higher tariffs on foreign-purchased materials is also heavily on the minds of many members. While relaxed regulatory reform and reduced taxes have helped business cash flows, increasing costs are top of mind for members.

Cybersecurity Risks

Various speakers during the meetings discussed cybersecurity. Many members indicated they had been targeted by cyberattacks. In certain cases, companies had lost considerable production time and had been damaged. Some were insured and others were not. The consensus was that cyberthreats are ongoing and may become more prevalent in the future. In fact, one speaker indicated the threat of negative impacts from China are likely more prevalent relative to cyberattacks than the potential costs of the anticipated tariffs. Overall, a review of the practices, policies, IT protections, insurance policies specific to cyber, employee training, etc., were discussed.

In summary, manufacturers remain positive about the future of their companies, in spite of continued challenges. It will be interesting to see how trade agreements and the midterm elections affect results in the near future.

Contact John or your trusted BKD advisor if you have questions.