2023 metal fabrication forecast: Reshoring gets real for manufacturers

Although talk of a 2023 recession pervades mass media, metal fabricators don't expect a significant slowdown. The data supports their view. Much of that has come from real evidence of reshoring and nearshoring across the industry.

Jamie Robbins has seen the effects of reshoring first-hand. The sales manager at Staub Manufacturing Solutions, a custom sheet metal fabricator in Dayton, Ohio, said the business saw a dramatic drop with the shutdowns in March 2020. "But then the orders started coming back with a fury," he said. "Customers who previously purchased parts from overseas now wanted to bring their manufacturing back, mainly based on the lead time to get products from overseas."

The trend applies to a broad swath of the shop's customer base, from those looking for medical work to others looking for trailer truck parts. "We have a wide variety of work. We’re not too heavy in any one industry and not too heavy with any one customer," he said.

To keep up with demand, the fabricator has increased its focus on automation, and it has boosted its cutting throughput with fewer, higher-power, fully automated fiber lasers.

"We actually went from four lasers to just two," Robbins said, "and we ended up increasing our capacity with increased cutting power and, especially, the automation."

Many progressive operations in metal fabrication probably can relate to Staub Manufacturing's story, which stands in stark contrast to widely reported economic concerns fueled by everything from inflation and politics to geopolitical conflicts.

Anecdotally, few in metal fabrication predict a major slowdown next year, though growth won't continue quite like it has in 2022. The negatives, like the potential of an inventory-overbuild (leading to a drop in demand), will likely be mitigated by reshoring and overall supply chain trends. Resiliency has become the buzzword of the moment. The risks of sourcing overseas, even with a strong U.S. dollar, aren't being taken lightly, especially if the supply chain relies on just a few key suppliers.

Within this context comes the metal fabrication industry's 2023 forecast. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association (FMA) and managing director of Armada Corporate Intelligence, Lawrence, Kan., predicts a softening of demand in the first quarter followed by a recovery during the last half of 2023. It won't be a year of record-breaking growth, but there isn't likely to be a major crash either. As mass layoffs make headlines in tech and as worries about a pending recession abound, metal manufacturing continues to hum.

Every month, Kuehl's team at Armada, in collaboration with Morris, Nelson and Associates, Leavenworth, Kan., publishes the Armada Strategic Intelligence System (ASIS), a report covering a cross section of manufacturing sectors that touch the metal manufacturing business.

"Our data matches up with what The Conference Board and others are saying," Kuehl said in a separate interview with The FABRICATOR. "We’re projecting overall negative growth in the fourth quarter, depending on what the consumer does, then slightly negative early in 2023. Then, conditions will steadily improve until we get to the fourth quarter of 2023, when the economy will be growing at 3% again."

Reflecting these predictions, the ASIS reported that overall industrial production (which includes both durable and nondurable goods) will weaken early in 2023 and then recover by 0.6% in the second quarter. The report showed similar trends in primary metals and the fabricated metal product sectors—again, a dip early in 2023 followed by a recovery later in the year. According to the October ASIS, the latest available at press time, primary metal production was expected to drop through the end of the year—with a nearly 10% drop in the fourth quarter (compared to Q4 2021), followed by a rise of 4.3% in the third quarter of 2023.

FIGURE 1. Fabricated metal products demand will likely dip in 2023 but then will see a gradual rebound into 2024.

Similarly, the fabricated metal products sector is expected to soften by the end of 2022, then stay contracted until the third quarter of 2023, when it's projected to grow slightly (1.4% in Q3 and 1.3% in Q4) near the end of the year (see Figure 1).

Primary metals and fabricated metal products feed parts to other sectors of metal manufacturing, everything from automotive and aerospace to machinery and electrical enclosures. Fabricated metals’ soft landing and recovery next year reflects the disparate performance of various sectors.

The strongest among them will likely be automotive (see Figure 2). ASIS has the sector growing nearly 10% next year. It appears that, at long last, the automotive supply chain will be catching a breather. As the report stated in October, "Chipmakers are seeing significant deceleration in demand from global markets, which should allow them to catch up to U.S. demand much quicker and address vehicle backorders."

Concerns remain in automotive, though, despite the projected growth—especially concerning auto loans. As the report stated, "Banking concerns continued with a growing number of overdue payments … Used car sales are still stable, but there are signs that overall sales are starting to slow a bit. That could also weigh on new industrial production, and inventories might not be built to pre-pandemic levels."

Supply chain shortages continue to affect the aerospace business, pushing the sector into "mixed bag" territory, according to the ASIS report. That said, demand in the sector is expected to grow significantly through mid-2023, then taper into the early part of 2024 (see Figure 3).

As the ASIS report stated, "Pilot shortages would be the biggest hindrance to future new aircraft demand. Some weakness in travel volume (due to inflation pressures on consumer discretionary income and service performance issues) might be affecting near-term demand." All this said, manufacturers in aerospace report "steady production [and are] more optimistic about 2023 than other sectors of the economy."

Globally, machinery production and sales have been breaking records. As of October, durable manufacturing orders of machinery, including warehousing and distribution machines, were still edging toward growth, with a 0.3% month-over-month increase. New orders in October were a full 7.3% higher than they were in 2021. Next year, though, the sector might have a breather as demand slows from 2022 highs. According to the ASIS report, "All of 2023 continues to show a drop in output."

"Machinery grew so fast," Kuehl said in a separate interview. "Many invested in what they needed, and now they’re waiting."

The ASIS shows a related sector—electrical equipment—contracting in 2023, then recovering near the end of the year into 2024. The sector also includes appliances, the sales of which are being hampered by the slowing real estate market.

Even here, though, reshoring opportunities are arising. As the ASIS reported, "Some foreign markets that were covering some of the production of appliances and electrical components are having difficulty producing products. This could push some of that production to the United States and lift production demand."

FIGURE 2. The automotive sector will likely have a strong 2023.

Kuehl, a frequent speaker at numerous events, including the FMA Annual Meeting and FABTECH, saw his frequent flier miles skyrocket in late 2022. People are over Zoom. They’re back on the road and meeting face-to-face.

"I’ve seen more optimistic groups than pessimistic groups, even on the manufacturing side of things," Kuehl said. "They’re complaining about the same things they’ve been complaining about for decades: ‘We’re doing well, we have plenty of opportunity, but we don't have enough workers. Logistics costs are high. Demand is through the roof. We just can't meet it.’"

Much of that opportunity has come from real evidence of reshoring and nearshoring. "The numbers I’ve seen out there are claiming almost $1 trillion in reshoring activity," Kuehl said. That said, how reshoring activity is measured affects the reported statistics. "What's being counted in the statistics is, of course, companies producing domestically rather than bringing products in from overseas. But it also means companies expanding their physical plant to accommodate new machinery as well as companies that are changing their supply chain to be sourcing more domestically." Put another way, the motives behind new manufacturing stateside could be a mix of increased domestic demand, restructured supply chains, and other factors. Regardless, supply chain risks are playing a major role in deciding where new production programs launch.

"We understand some risks of COVID have faded," Kuehl said, "but then they see what's going on in China," where (at this writing) certain lockdowns remain and uncertainties abound.

The strong U.S. dollar remains a factor in certain business decisions, Kuehl said, but the currency's strength isn't permanent. "The dollar's strength was based, and continues to be based, on the fact that the Fed was the first and most aggressive of the [central bank] rate hikers. The other currencies are catching up. The European Central Bank is raising its rates, and the same goes for the reserve banks of Australia and India.

"You’re beginning to see other countries raise their rates," Kuehl continued. "The U.S. dollar won't lose anything, but the other currencies will start to gain. That gap between the currencies then begins to narrow."

This recent shift, Kuehl said, helped boost late-2022 economic growth, with third-quarter growth rates surpassing expectations. "Why did that happen? Exports," Kuehl said. "We imported less and exported more. Companies that were looking at American exports waited until they had more leverage with their own currency and started buying again."

News of easing inflation in November calmed markets and tempered fears of a 1970s-style stagflation. Still, could high interest rates put the brakes on capital spending? Could manufacturers stop investing? Could productivity slow as prices continue rising? What's to stop this or other worst-case scenarios from happening?

One answer, Kuehl said, can be found by analyzing who inflation is hurting: those individuals and families making less than $50,000. They’ve seen wage hikes, but they’re also dealing with rising food and fuel costs—which, for a low-income family, consumes a large part of monthly income.

"But when you look at families making more than $100,000, which makes up a considerable portion of the population, you find they’re still sitting on disposable income," Kuehl said, adding that this population happens to drive a lot of consumer spending. "Richer people are saying, ‘Sure, we’re seeing inflation, but not enough to interfere with my demand.’"

FIGURE 3. Demand outlook in aerospace remains strong over the next 18 months.

Yes, labor costs are rising. Yes, equipment and real estate are pricey. Regardless, steady consumer demand is likely to continue driving growth, even in the face of inflation.

Many say the pandemic killed globalization in manufacturing, but as Kuehl explained, the story is a little more complicated. "Globalization was already on the decline even before COVID hit."

Consolidation played a role here. "What drove globalization early on was the option of using multiple suppliers," Kuehl said, adding that if one company didn't deliver, a global OEM could turn to another company to pick up the slack.

Over the years, manufacturers consolidated to gain efficiency of scale and formed closer partnerships with OEMs. This left globalization already on shaky ground when the world shut down in March 2020. Now, the manufacturing investment landscape has changed. Fewer large acquisitions are being made purely as a quick-turn investment play; more have a concrete strategy to ensure they can deliver products when and where they’re needed.

"These moves [aren't about] making quick money," Kuehl said. "They’re about protecting the supply chain. For the past two years, companies have seen their control lost in certain areas of their supply chain. Now, they’re working to get it back."

The Armada Strategic Intelligence System (ASIS) is published through a partnership of Armada Corporate Intelligence, armadaintel.com, and Morris, Nelson and Associates, www.mnallc.com. For information about ASIS, visit www.asisintelligence.com. More information on Chris Kuehl's Fabrinomics newsletter, published by the Fabricators & Manufacturers Association, can be found here.