As much as forecasts of an impending recession shape the business news today, manufacturing is in growth mode. Despite a gloomy macro-economic narrative, June’s Purchasing Managers Index (PMI) measured a solid 53, squarely in ‘expansion’ territory.

Moreover, against the backdrop of recession fears, manufacturers are increasing staff. In the same ISM survey, an “overwhelming majority” of companies said they were hiring.

In our ongoing series, we circled back with Jim Watson, CEO of California Manufacturing Technology Consulting (CMTC), to talk manufacturing and prospects for growth.

CompanyWeek: Jim, great to chat with you again. How do we parse the conflicting news? Is growth still on tap for manufacturing, or are we to interpret a slight downtick in the PMI as others have — a sign of contraction to come?

Jim Watson: No, growth is still on the minds of manufacturing leadership. However, while opportunities for growth exist, seizing new business is encountering some strong headwinds. The rise in inflation has increased materials cost, which is stressing margins and bottom lines. Supply chain issues continue to bring uncertainty in securing sufficient materials in time to meet demand. Also, finding skilled workers has inhibited many manufacturers from aggressively looking for new business. Today, growth is definitely an aspiration but proving to be elusive for many small- and mid-sized manufacturers (SMMs).

CW: We hear more and more about automation as a catalyst for growth. Can automation alleviate some of the pressure manufacturers are facing in trying to grow?

JW: Yes, manufacturers need to make automating a priority. In a manufacturing survey commissioned by CMTC last year, 61 percent of respondents said they will have a significant or moderate increase in automation in the next three to five years. However, because of the continuing need to increase productivity — that for the most part will be driven by automation — automation deployment timeframes will need to be expedited.

CW: I wrote last week that automation is becoming a magnet for attracting new workers. Are you seeing manufacturers improve workforce prospects via automation?

JW: Great question. The need for skilled workers is at an all-time high. In fact, California has a significant appetite for high and high-to-medium technology jobs — 51 percent of all manufacturing jobs in California fall into those two categories. In comparison, the nation has a lower level of tech employment at 43 percent of their manufacturing jobs. In addition, according to a CMTC-commissioned study by Beacon Economics, 63 percent of manufacturing jobs require a high school diploma (or equivalency) for an entry-level job.

The challenge is that, if you are not already automating, getting sufficient skilled workers to automate is a tall order. What comes first? The chicken or the egg? It’s estimated that there are presently more than 50,000 open manufacturing jobs in California. Upskilling existing workers could provide some relief in the tight labor market.

CW: Let’s switch gears. What role is the supply chain having with those manufacturers who want to grow?

JW: Those who want to grow will need to rethink their supply chains and look for ways to improve their own performance as a supplier to secure additional business. Effective supply chain management is becoming increasingly data driven. Today, close to 70 percent of supply chain functions are handled on spreadsheets; and, only 17 percent of manufacturers have extended visibility into their supply chains. Moreover, most manufacturers agree that they do not have the necessary digital skills to meet future goals. Without automating supply chain functions, increasing visibility to their supply chains, and reevaluating their suppliers, manufacturers will continue to struggle getting the right materials delivered at the right time to meet demand.

To grow as a supplier, internal processes need to be improved to eliminate waste then automated to expand production. Suppliers will need to focus on building operational efficiencies, managing costs, and enhancing their resiliency to increase the ability to overcome supply chain and environmental challenges.

CW: Has inflation impacted growth plans for manufacturers?

JW: Higher costs are lowering bottom line profits and reducing cash reserves. For many manufacturers, this has diminished financial resources that were going to be used to expand automation, sales, and marketing programs. This has greater implications in California due to already high costs associated with manufacturing. Cost control takes a front seat to reduce the impact of inflation. Also, the Great Resignation has significantly increased the cost of acquiring a skilled workforce, which is adding to the inflationary challenges for manufacturers.

CW: How would you sum up the outlook for growth?

JW: Growth opportunities exist in many manufacturing sectors, but challenges remain in the form of rising costs, supply chain issues, material, and labor shortages. Manufacturers will be tasked with acquiring new talent, adding capabilities, and diversifying product portfolios to act as a foundation for growth. Manufacturers must remain agile and be prepared to take action to build resiliency in the short term to set up future successes. Technologies will create both a challenge and opportunity for manufacturers to seize the opportunity to grow.

Reach Jim Watson at watson@cmtc.com; or Bart Taylor at btaylor@companyweek.com

And suddenly, it’s gone.

After a feel-good decade when the prospects of a sustained American manufacturing renewal seemed tantalizingly close, the news this month of soaring U.S. trade deficits and declining manufacturing output and GDP is sobering.

David Goldman summed up the wreckage last week.

“U.S. real gross domestic product (GDP) shrank at a 1.5% annual rate during the first quarter, more than the preliminary estimate of -1.3%, the Commerce Department reported on May 26. The worst trade performance on record took 3.2% off GDP, more than accounting for the entire drop. Nothing like this has happened before.”

America’s trade deficit in goods spiked to $128 billion in March, or an annual rate of $1.54 trillion, while U.S. manufacturers’ sales plunged after adjustment for inflation. In real terms, U.S. factory sales have fallen by nearly 10% since 2018, and by nearly 20% since 2007.

Consumers spent the lion’s share of the $6 trillion Covid stimulus on imports. That’s another first: U.S. manufacturing never contracted in the past following a big increase in demand.”

At the same time, Goldman notes that, “The biggest increase in U.S. imports came from China, which shipped 55% more to the United States in April 2022 (in seasonally-adjusted dollar terms) than it did in August 2019, when then-president Trump slapped 25% tariffs on most Chinese imports.”

Tariffs are intact. So much for the notion that tariffs slow down imports.

Yet tariffs alone were never going to compel companies to move production onshore without a strategy to also increase domestic manufacturing options. As much as supply-chain disruptions are forcing U.S. companies to rethink where to make products, without stateside options, many will fall back on offshore supply chains.

If that doesn’t change, then the positive news released earlier this month by Harry Moser’s Reshoring Initiative may be all for naught. Moser tracks the stated intentions of companies to reshore manufacturing jobs or invest in U.S. factories (FDI, or Foreign Direct Investment), and the trend continues to be positive.

Moser reported last week that in 2021, “[T]he private and federal push for domestic supply of essential goods propelled reshoring and foreign direct investment (FDI) job announcements to a record 261,000,” adding, “[T]he number of companies reporting reshoring and FDI set a new record of over 1,800 companies.”

More than that, with “5 million manufacturing jobs still offshore, as measured by our $1.1 trillion/year goods trade deficit,” there’s room for more growth in the U.S. sector.

If, of course, we’re successful nurturing a more capable manufacturing ecosystem. Moser isn’t as sanguine as his data suggests: “We see the administration applying tourniquets rather than addressing the underlying issue of U.S. manufacturing cost being uncompetitive.”

Yet we’ve had bad news before, and as Moser also tells me, “There’s a lag from reshoring announcements until production, sometimes years for the megafactories,” meaning the 2021 announcements aren’t manifest on the ground, yet. We need to ensure these companies can follow through on their stated plans.

Here then, is our crossroads. Moser would reverse what he calls America’s “deindustrialization” policy. “If you want to destroy your manufacturing, you’d do what we do,” he says. “Every poor country you want to help, you’d give them favored-nation status to import products to the U.S. with lower duties than they give us; you’d spend billions protecting the rest of the world from pirates and terrorism; you’d allow your universities to flourish in liberal arts and your skilled workforce to decline; and you wouldn’t have a value-added tax to protect your key industries. If you want manufacturing to disappear, that’s what you’d do. And we’ve done that,” he told me last June. It’s worth reiterating.

We’d also focus the national discussion around improving U.S. supply chains on specific action, to the refitting of U.S. suppliers and transparent mapping of supplier networks, across multiple industries, so that buyers can find expertise stateside where it exists.

As Goldman concludes, “China’s strong supply chains and robust manufacturing ecosystem attracted more foreign investment than ever from US companies such as Tesla, accelerating the shift out of onshore manufacturing.”

We’ll revisit what’s happening to reengineer the U.S. supply chain next time, as we push to enable more U.S. companies to manufacture closer to home. Our economy depends on it.

Bart Taylor is publisher of CompanyWeek. Reach him at btaylor@companyweek.com.