‘Talk People Off the Ledge’: Renowned ‘economist for rent’ talks manufacturing industry challenges
In helping companies navigate ever-shifting challenges, few people have more expertise than Dr. Chris Kuehl.
As co-founder, managing partner and chief economist for the Kansas-based Armada Corporate Intelligence, Kuehl specializes in analyzing market forces like inflation, recession and war.
Armada counts Fortune 500 companies and government agencies among its varied list of clients, which includes manufacturing to energy to transportation to financial services.
In June, Kuehl was the keynote speaker for the annual Grand Traverse Area Manufacturing Council (GTAMC) Manufacturing Summit. His keynote address, “Recession, Inflation, and War – Oh My!”, explored the many challenges facing the manufacturing industry in 2022, including supply chain breakdowns, labor shortages, runaway inflation rates, and the threat of an impending recession.
Ahead of Kuehl’s visit to the region, the TCBN sat down with the seasoned world economist to pick his brain about these topics and more.
Kuehl: Well, we’re about 23 years old. For about 15 years, I was in academia. I taught in the U.S. for some small schools, and then I taught in Russia, Estonia, Hungary, Singapore and Taiwan. I finally got tired of talking about money and not making any, so I decided to start my own company.
At Armada, we describe ourselves as economists for rent, so we work a lot with associations and private clients alike, with a concentration in transportation, construction, and manufacturing.
Our list of manufacturing connections is pretty long. We’ve gone about 20 years working with groups like the Fabricators & Manufacturers Association, the Forging Industry Association, the Chemical Coaters Association International, and the Industrial Heating Equipment Association.
TCBN: What are some of your main talking points when you speak to a manufacturing group like GTAMC?
Kuehl: There are really three themes that I try to hit. Number one, I’m trying to talk people off the ledge. There’s so much discussion about recession, and stagflation, and this, that, and the other thing, and most of it is just silly. The data doesn’t support it. In truth, the data is actually showing something of a recovery in some areas. Not that these problems aren’t significant and severe. We can’t be looking at 8% inflation and not feel it, but we also know where that’s coming from. We know that it’s related to the supply chain and it’s related to the Ukraine war, both of which can potentially be temporary.
The second theme is about reiterating the importance of manufacturing. In a way, we still don’t really understand what role manufacturing plays in the U.S. because the data is often misinterpreted. You’ll hear people say things like, ‘Only 8-9% of people work in manufacturing, so how important can it be?’ And that’s because we categorize people by the job they do, not who they work for.
So, 92% of people who work for Ford Motor Company are not considered to be in manufacturing, which would probably come as a great shock to the person who has worked at Ford for 30 years. ‘Excuse me, we make vehicles! How am I not in manufacturing?’ Well, you’re in HR, or you’re in marketing, or you’re in design, or you’re in accounts receivable. The only people who are counted as manufacturing jobs are the ones who are working on the line. And the more we roboticized, there are fewer and fewer people there. But if you actually look at who people work for, almost 30% of the population works for a manufacturer.
I also try to dispel the myth that we don’t want to make anything anymore (in the U.S.). We make a lot of things, and we make high-value things. We actually account for almost 40% of global manufacturing value. China accounts for about 10. They make a lot of things but they’re not high value. We make airplanes, and railroad engines, and road building equipment – stuff that’s very expensive, where the average person doesn’t own one of them. People say, ‘Everything in my house is made in China!’ Well, that’s because you don’t have a 737 sitting in your backyard.
Finally, the third thing is just trying to get a little bit ahead in terms of what to expect in manufacturing. What are we going to see the rest of this year? What are we going to see in 2023? And honestly, it’s kind of a mixed bag. Some of the data is actually beginning to improve; other things, we’re still waiting to see. The Purchasing Managers Index looks good. Capacity utilization looks good. You’re starting to see wage hike declines, which is predictable, because companies are saying, ‘Look, there’s a limit to how much I can raise wages.’ And what they’re doing now is shifting more toward robotics and technology.
TCBN: The supply chain been such a constant thorn in the side for manufacturers since the start of the pandemic. Is there a road back to a normal supply chain?
Kuehl: Yeah, there is, and we’ll probably see some evidence of that even before the year is out. The major concern now is China. Domestically, we have more or less solved our supply chain issues. Go back to the beginning of the year and you still had 14 loads for every truck on the road. It’s now down to three. We’re still a little bit under capacity, but not as bad as it was even at the beginning of the year. Our ports were absolutely jammed at that point, and they’re not now. They’ve caught up.
On the other hand, China’s ports are completely clogged because of their ongoing lockdowns. There are hundreds of container ships that are just unable to load or can’t leave the port. Now, you’re starting to get some real criticism of the Chinese government from the industrial community saying, ‘This zero tolerance (for COVID) thing isn’t working, and it’s crashing the economy in the process; you’ve got to stop this.’ But in the meantime, the supply chain crisis is kind of anchored in China.
Little by little, though, other countries are picking up the slack. We’re doing 93% more business with Vietnam than we did two years ago, and we’re seeing more activity throughout Asia. We’re also seeing a lot more reshoring. The silver lining to this supply chain mess is that it’s encouraging companies to come back to the U.S. We’ve seen over a trillion dollars worth of reshoring this year already, and we’ll probably see another trillion. The new Intel factory in Ohio, they are telling their suppliers, ‘Look, if you do not have a U.S. supplier, you cannot work with us.’ That’s not going to be an immediate solution; the Intel factory is still two years away (from opening). But you’ve got this fundamental shift happening where manufacturers are saying, ‘Well, maybe we shouldn’t have taken everything offshore.’”
Of course, that creates another challenge. As in, ‘We’re going to bring stuff back to the U.S., but do we have enough workers?’ And the answer is no, we don’t. So that’s going to be the next shoe to drop. Manufacturers are going to be saying, ‘Okay, we’re home. Can you train some people please?’
TCBN: That’s the next question: What is the temperature check on the labor situation?
Kuehl: It’s a big problem, and there isn’t a short-term answer to that either. Immigration, once upon a time, was the solution, because you had jobs for people with limited skills, language barriers, all that. You don’t now. The average manufacturer is saying, ‘Look, I don’t hire that kind of person anymore. I need somebody who can run a laser cutter and program a robot welding arm. I need technically trained people.’ And we’ve neglected trade schools, and not enough community colleges offer this type of training, so we don’t have those people.
Short term, what a lot of companies have started to turn to is the gig economy: basically, hiring people on a more temporary basis – particularly if they can do what they do remotely. So, you’re now getting people with the appropriate skills who may end up having three or four employers because they’re working for all of them remotely.
Long-term, we just have to get better at training. Many companies are taking it on themselves, but 75% of manufacturers in this country are small. They have 20 or 25 employees. Who’s going to do the training? You’ve got a small staff to begin with, and now you’re telling them, ‘OK, I want you also to train Skippy here who’s never been around a machine in his life.’ And if you’re already working 55 hours a week, you’re probably asking, ‘How am I supposed to do this?’ So that’s probably the most vexing issue (on the labor side), and that’s part of what’s driving all the automation. If companies can’t find employees, the logical thing to say is, ‘OK, I’m going robotic. I know it’s a big investment. I know it’s going to put a dent in my budget for a while. But hey, once I have the robot…’
TCBN: How do all these trends coalesce? Do you have any big-picture predictions for where the industry will be one year, three years, five years down the road?
Kuehl: The big picture is that we’re probably fairly challenged for yet another year, but then getting back to some sense of normal by 2023. We’re kind of in what’s called the bullwhip effect, and that’s where, when companies are concerned about supply chain, or about inflation, they tend to overbuy; they’re doing as much inventory accumulation as they can, so that they don’t get caught like they’ve been in the last year. A point will come where they have overbought, and they’ll have more inventory than they know what to do with, and then you’ll start to see the prices come down, because companies are going to be trying to get rid of that inventory. When you get to that point, which will probably happen in 2023, you’ll start to see more balance.
One of the things we watch like a hawk is the inventory-to-sales ratio. When you have too much inventory or too little inventory, it puts stress on a business. You want to be in that small balance zone where you’ve got those two things matched. We had way too much inventory in 2020, because of the COVID recession; way too little in 2021, because we came back so strong. We are now finally starting to get into that magic box. Manufacturing as a whole is only about maybe 2-3% off from being in that in that area. Automotive, on the other hand is like 88% off, so some sectors have not recovered. But manufacturing, in general, is almost where it needs to be.
So, I think I’m being fairly optimistic about the end of this year and early next year (for manufacturing). We might go through another rough quarter or two and then start to see adjustments, but that can happen even faster if somehow there’s a solution to the Ukraine mess, or if China decides to quit enforcing zero COVID policies. Things could change dramatically, very quickly.