The Federal Reserve reduced its key interest rate by half a percentage point yesterday, setting it between 4.75% and 5%. This move has been welcomed by many manufacturers who have been struggling with a slowdown in the industry over the past few months.
However, experts are urging caution about how quickly this cut will lead to a recovery in manufacturing. According to Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, manufacturers likely won’t feel the benefits of this reduction until next year.
“We’ve been in decline for three months,” Fiore said. “I don’t expect to see a recovery in manufacturing until January.”
Manufacturers are expected to delay ramping up production until they can reduce their excess inventory, which has accumulated due to months of falling demand.
Throughout the year, high interest rates and uncertainty over potential rate cuts have caused manufacturers to prioritize liquidity over investing in workers, equipment, or expanding production capacity.
Although there were hopes for growth in the second half of 2024, the lack of interest rate relief and continued decline in demand pushed production to its lowest level in four years, as reported by the Institute for Supply Management’s August PMI report.
Fiore emphasized that addressing low production levels and excess inventory will take time and won’t be resolved within just a few weeks or months.
“The delay in action caused significant damage,” Fiore said, adding that manufacturers could have benefited from an earlier, smaller rate cut to alleviate some of the financial strain caused by the slowdown.
Despite this, the recent rate cut is expected to boost consumer confidence by lowering credit card interest rates, potentially encouraging more spending, said Ted Stank, co-executive director of the Global Supply Chain Institute at the University of Tennessee Knoxville.
“Increased consumer demand lifts all industries,” Stank noted.
Lower borrowing costs could also prompt manufacturers to resume capital investments they had postponed, such as upgrading factory equipment or IT systems.
Fiore suggested that these improvements might help reduce inventory levels before the end of 2024, even if significant growth doesn’t occur until early next year.
Nevertheless, companies planning manufacturing layoffs are unlikely to reverse their decisions, according to Fiore.
“It might slow down the rate of job losses, but it won’t completely stop them until order books start filling up, which will likely take most of 2024,” Fiore said.
While concerns over interest rates are easing, uncertainty about the upcoming presidential election is now weighing on manufacturers.
Many companies may delay major investments until after the election, as its outcome could have significant implications for the industry.
Fiore explained that businesses are waiting to see which candidate will set policy for the next four years and how that might affect government investment in the economy. For instance, Vice President Kamala Harris has supported clean energy initiatives, while former President Donald Trump has emphasized the need for more oil drilling.
“The key question is, ‘Where will we invest or provide incentives in the economy?’” Fiore said. “Will it be in semiconductors, photovoltaic cells, or windmills? It’s a good position to be in because now we’re deciding where to invest, not whether we will.”
The Fed’s next meeting is scheduled for November 6, the day after the presidential election. Stank advises manufacturers to proceed cautiously until then.
“Let’s wait and see how things unfold through November,” Stank advised.