Manufacturers – Where We Are, Where We Are Headed
There is much being said about the nation’s manufacturing industry and where it is headed under the new administration. Though it is impossible to predict the future of manufacturing with any certainty, what we do know is where the industry currently stands and what is being proposed by President Trump. Join us as we take a look at the manufacturing industry from both a national and local perspective.
Where we are
The nation enjoyed a continued increase in real Gross Domestic Product (GDP) through the fourth quarter, though at a decelerated rate from the previous quarter. Factors combining to create slower growth are a downturn in exports and an acceleration imports. (1)
Manufacturing-specific numbers in the U.S. (3rd quarter 2016) showed a 5.1% increase in durable goods manufacturing, a marked improvement compared to the 2nd quarter. According to the Bureau of Economic Analysis (BEA), this reflects increases in motor vehicles, bodies and trailers, and parts manufacturing, as well as computer and electronic products manufacturing. For the same period, real gross output for durable goods manufacturing (principally a measure of the industry’s sales or receipts, which includes sales to final users in the economy (GDP) and sales to other industries (intermediate inputs)— made an impressive comeback in the 3rd quarter, increasing by 2%, after decreasing 2.0% in the 2nd quarter.
Nationally, manufacturers continue to be able to take advantage of a variety of tax credits and incentives, including the Work Opportunity Tax Credit (WOTC) and the Research and Development (R&D) Tax Credit. The tax credits and incentives available to manufacturers and distributors in Georgia include the Job Tax Credit, Quality Jobs Tax Credit, Port Tax Credit, Investment Tax Credit and the Retraining Tax Credit.
Manufacturers may be able to take advantage of deductions for interest expenses to offset the corporate tax rate. They may also be subject to the corporate alternative minimum tax (AMT).
Manufacturing Industry Highlights
In Georgia, our unionization rate is the third lowest in the U.S. (GDEC) at 5%. In an effort to increase and improve our workforce, Georgia has funded Quickstart, an initiative that may pay 100% of a student’s technical college tuition for specific programs of study in high demand careers. This program has been ranked the best in the nation. Our logistics remain a strong draw for manufacturers and distributors, combining the Port of Savannah and its expansion, Hartsfield Jackson International Airport which puts 80% of the country within a two hour flight of Atlanta and our low cost of doing business as compared to the rest of the nation.
On a national level, the unionization rate is 6.4% (private sector). The backbone of manufacturing in the U.S. is comprised of firms that are “quite small” according to the National Association of Manufacturers. According to the U.S. Census Bureau, in 2014, there were 251,901 firms in the manufacturing sector, with all but 3,749 firms considered to be small (i.e., having fewer than 500 employees). In fact, 75% of these firms have fewer than 20 employees.
This speaks to the importance of making it easy for manufacturers to do business and to have access to trained, skilled workers. Which leads us to the future.
Where We’re Going
Manufacturing has been on an upswing in many categories and the economy has experienced 90 consecutive months of economic expansion. The new administration is touting a pro-growth approach, with much focus on the manufacturing sector. In January, President Trump introduced the Manufacturing Jobs Initiative / Manufacturing Council, a gathering of executives of large manufacturing companies to discuss issues, challenges and opportunities for U.S. manufacturers.
In an effort to ease regulatory and tax burdens on manufacturers, the administration is proposing:
- Reduction of corporate tax rate from 35% to 15% and a reduction (or elimination) of some deductions made unnecessary by the lowered rate
- Manufacturers allowed to immediately expense new business investments in lieu of a deduction for interest expense
- Elimination of the corporate alternative minimum tax
- In regard to international taxes, President Trump has proposed all earned foreign subsidiary income should be taxed and there should be a one-time 10% transition tax imposed on the deemed repatriation of profits of foreign subsidiaries, payable over 10 years.
International Trade Agreements
The decision of the U.S. to withdraw from ratification of the Trans-Pacific Partnership (TPP) is likely to have multiple effects on the U.S. manufacturing industry. We discuss this in more detail here. The North American Free Trade Agreement (NAFTA) is on the table for renegotiation, including tariffs on goods imported to the U.S. This action could make it economically challenging for a U.S. business to produce or manufacture outside the country and transport its finished products back to the states. While this could increase costs of sourcing, it would naturally increase local-for-local manufacturing. This would likely translate into more U.S. plants with new jobs and an increased demand for sophisticated manufacturing technology.
Interest rates are projected to increase over the next few years – a likely occurrence regardless of who landed in the White House. The first and most obvious effective of this would be an increase in borrowing rates. This not only effects a manufacturer’s own ability to purchase through borrowing, it potentially increases costs for suppliers which increases the costs for manufacturers and results in higher prices for consumers. In addition, an increase in the interest rates may result in a stronger dollar, making U.S. exports more expensive in foreign markets. Conversely, dollar strength would decrease the costs of U.S. manufacturers purchasing foreign-made inputs (absent a border tax or something similar). A stronger dollar would have its greatest impact on manufacturers who operate globally (which accounts for many U.S. manufacturers these days).
Where are we going? The truthful answer is: no one really knows. It depends among other things on which tax packages – both corporate and individual - are proposed and passed, which regulatory reforms pass (healthcare, immigration, etc.) and how the country’s debt and trade issues are managed. Regardless, manufacturing is a key piece of the U.S. economy and a key commitment of Smith & Howard. We are honored to work with many manufacturers and distributors who operate in Georgia and around the globe and look forward to helping them succeed and grow in the coming years.
Check back with us throughout the year as we provide updates when legislation is proposed and passed that affect you and your business.
(1)Bureau of Economic Analysis, February 28, 2017 https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm