The looming government shutdown's potential impact on manufacturers

REAL ECONOMY BLOG | September 29, 2023

Authored by RSM US LLP

Though the looming government shutdown would likely only push a small portion of economic activity into 2024, it could have significant impact on middle market manufacturers.

One reason for this is that October can be a critical time to manage supply chains, address any potential disruptions and get deliveries of raw materials and components back on track if they’ve fallen behind. A shutdown would slow imports and exports because of reduced government staff at ports and customs, delay necessary compliance and permitting processes and affect government funding to support midsize manufacturers. All of this would limit access to necessary manufacturing components and threaten to introduce new supply chain snarls.

Export and import delays

Imports to the United States have been on the rise, which shows that while the country has taken industrial policy strides to rebuild domestic supply chains, it still relies heavily on global supply chains. Delays of imported raw materials, components or parts for manufacturers can disrupt processes and lead to production falling behind schedule.

Manufacturers may need to maintain higher levels of inventory to mitigate the risks associated with delayed imports. This can tie up working capital and increase storage costs, further straining financial resources in a time where higher interest rates and rising wages are already driving the cost of doing business up exponentially.

On the export side, there are numerous considerations manufacturers need to be aware of, including:

• Cash flow constraints: Manufacturers may experience cash flow constraints if expected export revenues are delayed. This can affect their ability to invest in new projects, pay suppliers, or cover operating expenses. According to the third-quarter RSM US Middle Market Business Index survey, 63% of respondents expected to increase outlays on productivity – enhancing capital expenditures. Export-dependent manufacturers may need to reconsider capital investment timelines to ensure the appropriate leverage and work with financial institutions to devise a capital investment plan that meets their immediate liquidity needs.
• Market reputation issues: Consistent delays in fulfilling export orders can damage a manufacturer’s reputation in international markets, potentially affecting future business relationships at a particular time when the U.S. is reestablishing its global position.
• Inventory management challenges: Manufacturers may need to adjust their inventory levels to accommodate delayed export orders. This can impact their production and logistics planning. According to the most recent MMBI, 56% of respondents are planning to increase inventory levels through the end of the year. This approach may need to be altered for export heavy manufacturers.
• Competitive disadvantages: Manufacturers may lose market share to competitors who can deliver products more reliably and quickly to international customers.

Other impacts: Contractors, compliance, funding

Manufacturers in the aerospace and defense markets, which are heavily reliant on government contracts, could find themselves on pause if the shutdown does happen. Key contracts set to renew could be delayed, which would cause revenue loss and bring significant budgetary limitations as October is prime time for annual budgets.

There are numerous impacts a government shutdown would have for manufacturers on the regulatory compliance front, too. A reduction in government employees can slow or halt communication between businesses and government agencies when it comes to permits or inspections, further delaying an already tedious process.

Manufacturers engaged in international trade typically undergo inspections related to customs compliance, import/export permits, and product quality and safety standards, depending on the products and countries involved. A shutdown would delay those inspection processes, and the same would be true for companies involved in defense, aerospace, or other sensitive industries that undergo compliance checks related to export controls and compliance with international arms regulations.

When a manufacturer establishes a new facility or expands an existing one, government agencies may conduct inspections to ensure that the facility complies with zoning, safety, environmental, and other regulations. As of the third quarter of 2023, manufacturing construction starts are down nearly 2/3 on top of the most significant manufacturing construction spend in decades. A government shutdown means further project delays, and delayed return on investment on significant capital spend.

Also at risk is funding for government programs such as the National Institute of Standards and Technology (NIST) Manufacturing Extension Partnership (MEP), a nationwide network of centers that provide technical assistance and support to small and medium-sized manufacturers. MEP helps manufacturers improve their competitiveness, productivity and efficiency. MEP is one of many government-funded programs which support the manufacturing sector, and delays or uncertainties around such funding would present a significant challenge for manufacturers in the real economy.

Are there ways to prepare?

Executives may not be able to stop a shutdown, but there are things manufacturers can do to brace for its impact. Those include:

• Leveraging data analytics to determine appropriate inventory levels for fourth-quarter order fulfillment
• Proactively communicating with suppliers and customers to adjust timelines and optimize inventory levels
• Diversifying the supplier portfolio where possible to minimize production delays
• Assessing budgetary needs through the end of year to determine financial resource allocation (i.e. IT investment and inventory management resources)

These actions can help middle market organizations prepare for the impact of a shutdown, even if it remains to be seen how long the shutdown might last.