State of the National Manufacturing Industry: September 2020

Back in June, Marcum issued the first in our series of updates on how the manufacturing industry is faring in light of the pandemic. In that article, we assessed its impact on materials sourcing, the cost of goods, and workforce reductions. We predicted that the manufacturing industry would maintain or slightly contract during the second half of the year. That outlook was based on manufacturers predicting smaller backlog and fewer orders.

According to the NAM Manufacturers’ Survey for the second quarter, despite severe challenges and business interruptions due to COVID-19, manufacturers have continued to operate, with more than 50% of large manufacturers completely operational and roughly 73% of small and midsize firms stating the same. Still, only 33.9% of respondents reported a positive outlook for their company, the lowest reading since the first quarter of 2009 during the Great Recession. Now that we’re well into the third quarter, where do things stand now?

PPP Considerations

Manufacturers are aware that the Payroll Protection Program (PPP) has come to an end. As part of the CARES Act, these loans were made available to cash-strapped small businesses in April. The SBA stopped receiving PPP applications from participating lenders on August 8; more than 5 million businesses received funding. As a reminder, PPP loan recipients can have their loans forgiven in full if the funds were used for eligible expenses and other criteria are met, such as maintaining employee headcount. The SBA has published a new FAQ to help PPP borrowers calculate how much of their loan is forgivable. The PPP loan forgiveness period is as follows:

• Those who received a PPP loan number on or before June 5 have the option of taking 24 weeks to spend the funds instead of the original eight weeks.
• Borrowers who took loans after June 5 automatically have a forgiveness period that is the shorter of 24 weeks or the period between the date of the loan to December 31, 2020.

While it may sound advantageous to have more time to spend your loan proceeds, some manufacturers may find it easier to maintain staffing levels for eight weeks than 24 weeks. On the other hand, more of the loan can be spent on payroll costs under the 24-week forgiveness period.

The SBA opened its forgiveness portal the second week of August, but borrowers will need to work with their tax professionals as additional rounds of guidance about forgiveness are released.

Workforce Reductions

According to the NAM second quarter report, the expected growth rate for full-time employment over the next 12 months is down 2.2%, the lowest rate since the first quarter of 2009. As we wait to learn about further stimulus dollars, most manufacturers will need to take a serious look at headcount to determine whether they will have to reduce staff. Business decisions regarding headcounts and workforce reductions should be weighed against PPP forgiveness. Some manufacturers may decide they don’t want to carry debt from PPP loans on their balance sheets. Others may find it necessary to make more immediate workforce reductions.

New Orders

New orders are shrinking for some manufacturers. Why? The reasons range from industry consolidation to leaner workforces among manufacturers’ customers. While smaller job shops are continuously looking for new business, larger manufacturers seek long-term supply contracts, and the frequency of those supply arrangements is shrinking. We’ll learn more about the impact of these challenges in the fourth quarter.

If your customer base is shrinking due to COVID-19 or other reasons, now is the time to take strategic and tactical steps. For example, do you need to diversify your product mix? And, do you need to reexamine and update your value proposition? If your sales volume is at risk, you will want to take a fresh look at your cost structure.

Reevaluate Your Customer Approach

Your customers have much more leverage than they have had in the past several years. Customer demand, when strong, calls for an “under-promise/over-deliver” approach. For example, your customers may request earlier delivery, calling for you to find a way to expedite freight and bear more of those costs. In other words, you may need to find creative approaches to “buy the business.”

As we wait to learn more in these last few months of 2020, it is important that you have discussions with your supply chain partners today. If applicable, when your PPP loans are forgiven you will have the ability to make important workforce decisions.

Marcum’s Manufacturing & Distribution advisors will continue to update you on the state of the nation’s manufacturing industry. Contact your Marcum professional for assistance.

Coronavirus Resource Center

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