The Chaos Theory in effect; a disturbing glimpse of what is happening with American manufacturing

BY SIMONE J. SMITH

“We are seeing a pronounced slowdown in owners going forward with new projects. There is too much uncertainty in the economy and globally.” (Fabricated metal product manufacturing)

As a journalist, I have had the great privilege of being exposed to many different topics that ordinarily I would not pay attention to. What has truly stood out to me is the fact that the Chaos Theory is in fact a very real phenomenon. Let me explain.

One of the key concepts in the Chaos Theory is the butterfly effect, which suggests that the flap of a butterfly’s wings in Brazil could set off a chain of events that leads to a tornado in Texas. This metaphorical idea illustrates how small changes in initial conditions can lead to significant differences in outcomes in complex systems.

Theory intersects reality when discussing the Chaos Theory; it deals with complex systems (humans) whose behavior is highly sensitive to initial conditions. It studies systems that appear to be disordered and random (life), but in fact, have underlying patterns and deterministic behavior. These systems (humans) are highly sensitive to small changes in their initial conditions, which can lead to drastically different outcomes over time.

Where am I going with this you ask; well Bloomberg released an article last week that discussed what is happening in parts of the United States manufacturing industry, and what I saw concerned me.

“Six months from now is actually quite scary. The economy is uncertain, and customers cannot predict with any certainty what they see. Political pressure and the wars are now forcing customers to reevaluate their business activities and reduce their outlook. It’s very uncertain.” (Machinery manufacturing)

Last week the Dallas Fed’s Texas Manufacturing Outlook Survey came out, and it provided a disturbing glimpse of what is happening with manufacturing. The Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Firms are asked whether: output, employment, orders, prices and other indicators: increased, decreased or remained unchanged over the previous month.

Unfortunately, what was reported back in the survey was not good at all. While regional manufacturing surveys have been in the gutter for a while, Joe Weisenthal (the Bloomberg reporter) stated, “I can’t remember a time when the commentary from survey respondents was this negative.”

I want you to stay with me here, because at the end it will all come together.  I decided to take a look back at what had been forecasted for manufacturing in the United States, just to see how well experts had made their predictions. I found a concise report put out by Deloitte titled “2023 Manufacturing Industry Outlook.” In this report it discussed how US manufacturing had demonstrated continued strength in 2022, building on the momentum it gained emerging from the pandemic. Looking ahead to 2023, Deloitte projections, based on Oxford Economics’ Global Economic Model, anticipated a 2.5% growth in GDP in manufacturing.

In the report they stated that while overall demand and production capacity had hit recent highs, there were indications that the near-term outlook may not be as bright. The industry at that time was experiencing concerns related to inflation and economic uncertainty.

In addition, manufacturers were grappling with talent challenges that limited the industry’s growth momentum. The industry was dealing with supply chain issues, including sourcing bottlenecks, global logistics backlogs, cost pressures, and cyberattacks. These disruptors had affected manufacturers’ optimism and business confidence, pulling the second-quarter Manufacturing Outlook Index to 55, down by 4.2 points since first-quarter 2022.

On a positive note, they did project that the acceleration gained in 2022 was expected to continue into 2023, though headwinds of supply challenges, labor shortages, and an uncertain economic environment would persist.

Energy price volatility, higher labor costs, and inflation worries could also affect the industry. In addition, the impact of legislation passed in 2022 would likely become more evident in 2023. Amid these uncertainties, innovations and solutions pioneered in 2022 were expected to gain momentum in 2023, potentially altering tried-and-true business practices in the pursuit of growth and productivity.

They conclude the report with some thoughts for companies to consider:

• Increasing the utilization of digital technology to increase supply chain visibility, productivity, and connectivity with suppliers, partners, and consumers
• Growing focus on attracting and retaining talent through upskilling; reskilling; providing flexibility where possible; and promoting diversity, equity, and inclusion in the workplace
• Mitigating supply chain risk through building local capacity and moving from just-in-time sourcing to create redundancy in the supply chain
• Implementing smart factory initiatives to achieve targeted business goals
• Adapting strategies for the future of work

Well, it looks like many of these predictions were correct, and the responses from the survey showed that. Here’s a sampling of quotes from the Dallas Fed’s Texas Manufacturing Outlook Survey . Each one is from a regional manufacturer. The parenthetical indicates what industry the respondent comes from:

• “Business has slowed down significantly; we see no signs of improvement in business activity.” (Machinery manufacturing)
• “Oh, how we long for the days of a stable market. We just lost another long-time customer to China where the pricing for the finished product was what we pay for the raw material. With the inflation we have being imposed on us here in the U.S., we won’t ever see those customers come back.” (Machinery manufacturing)
• “In a consumer business, we are hearing a lot more “I can’t afford this” than we ever have before.” (Miscellaneous manufacturing)
• “Activity is definitely slowing down. We remain optimistic at this point for a turnaround, but cautiously.” (Paper manufacturing)
• “We anticipate that business conditions will remain constant, or decline over the next three to four months, based on the rate that we are receiving orders. Oil and gas orders have been weak all year, which is strange since oil prices have been high and are anticipated to continue to increase with the uncertainty in the world order.” (Primary metal manufacturing)
• “We are currently forecasting a 20 percent drop in 2024 versus 2023 (previously planned for a 13 percent drop), so the market forecast has worsened month over month.” (Transportation equipment manufacturing)

Here is what we need to think about as Canadian’s; how badly is this going to affect us? How is the chaos across the border going to bring disruption to our lives?