What Effect Will Rising Interest Rates Have on Manufacturing?

Several weeks ago, Federal Reserve Chairman Ben Bernanke rattled economists by alluding to an imminent tapering of the Fed’s quantitative easing. The almost immediate reaction was a jump in interest rates, which quickly rose from the mid-3-percent range to above 4 percent, where it has hovered ever since.


Even after an announcement by Bernanke that the stimulus would continue until unemployment dipped below 6.5 percent, interest rates continued a gradual but determined rise. Higher interest rates have a direct impact on the affordability of homes and cars, two critical markets that manufacturers rely on. They also make large capital equipment purchases less affordable, and make it more challenging in general for businesses to obtain or afford loans. All this could have a significant impact on the manufacturing sector.

IMT asked several industry experts how drastic the effects of higher interest rates will be once they occur. Opinions were split, but the majority said that manufacturers could weather a rise in interest rates.

“It’s inevitable, and all of the smart manufacturing companies are preparing for it, so I really don’t think it’ll have a negative effect at all,” said Brad Holcomb, chair of the Institute for Supply Management (ISM)’s Manufacturing Business Survey Committee. “There may be some really short-term negative effects, but the [long-term] effect will hardly be discernible. Manufacturing in the U.S. has been an anchor of the economy for decades, and has gone through a lot of gyrations.”

Holcomb said the economic crash in 2008 forced manufacturers of all types to restructure and adapt, thereby making them more resistant to severe economic consequences.

“They’ve really built in a lot of efficiencies, and added a level of employment and oversight that they might not have if not for the tough times in 2008,” Holcomb said.

Patrick McGibbon, the vice president of industry intelligence for AMT – The Association For Manufacturing Technology, is cautiously optimistic, citing the slow growth in the past as the reason that manufacturers will be prepared for interest rate changes.

“In 2010 to 2011, when the Fed started the easing, it didn’t have as dramatic of an impact as we thought because the banks were still stingy,” McGibbon said. “They’re still not opening their doors today to small manufacturers; it’s still a tough nut to crack.”

He added, “Right now you’re seeing a lot more capital equipment being self-financed, and as interest rates go up, people will be asking: should I be borrowing, and what should I be doing with my cash?”

McGibbon said the Fed “has done as much quantitative easing as it can do,” and that manufacturing isn’t “pulling the wagon for the whole economy anymore. I don’t know if it needs as much help as the Fed thinks it does.”

Both McGibbon and Holcomb agreed that the housing and auto industries’ fates are, as usual, inextricably tied up with manufacturers’ output; as the housing market and the vehicle market continue to improve (recent statistics show that 2013 could see 15 million new light vehicles made in the U.S., the highest number since 2007), manufacturers may see short-term dampening effects.

“Those car companies are still going to be buying equipment and supplies, and consumable goods are still going to be in demand,” McGibbon said. “But you also have to realize that, for manufacturers, the customer who goes out to buy capital equipment is suddenly going to get less for his dollar because of the interest rate.

“So he can either buy a less sophisticated machine, or he can buy upscale on the specification of the machine, and do more of that quality and automation by hand. So overall the productivity may change, but not by that much.”

Not all experts see a rosy outlook for manufacturing, though. Molly Brogan, the vice president of public affairs for the National Small Business Advocate, said she sees a great deal of concern among her members.

“It’s going to put an even bigger cramp in capital [spending] if rates go up,” Brogan said. “The ratings and lendings standards are a lot tougher now. Most manufacturers are brick and mortar, and if interest rates go up, it might be even harder for manufacturers to secure loans.”

Brogan also said the housing and car markets slowdown that will follow the tapering of the stimulus will hit manufacturers hard.

“It’ll have a big effect on suppliers, and it will have a big impact on the value of the dollar,” she said. “A lot of manufacturers export, and they’ll struggle a lot more if the value of the dollar goes down.”

Still, Brogan says her members are not panicking just yet.

“It’s more of a slow burn,” she said. “There’s still a lot of time before rates really change much.”

 

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