Economic Outlook Symposium Outlook for Key Sectors I

SPEAKER 1: So Buckley is our Wisconsin representative in the group today. And so he is the executive director of the Wisconsin Center for Manufacturing and Productivity. And I don't know if you'll agree with this, Buckley, but I wrote down it's a small but mighty organization that partners in a number of initiatives in Wisconsin aimed at helping manufacturers in Wisconsin improve their operations.

And one of the big things that they do is they do a survey-- actually, similar to the survey we do, but I'm guessing it seems like it's more in depth than what we do as well. And it's a kind of a more annual report where they go and talk to small and medium manufacturers, medium-sized manufacturers, and get insight into how Wisconsin manufacturers are feeling about their operations.

And so Wisconsin, it's one state, but it's a really important state in terms of the manufacturing sector. So I think Buckley is going to be sharing insights from his survey and work with us. And I'm sure it's going to be applicable to the manufacturing sector as a whole. And so let me welcome Buckley up and turn it over to him. All right.

BUCKLEY BRINKMAN: Thanks, Thomas. Thank you, Thomas, for putting some numbers up here. I thought this was going to be really an irony that the least economist type person in the room would provide the most numbers. So thank you, Tom.

Wisconsin Manufacturing Report, we're in the fourth year. We do it every year. It's an in-depth look at manufacturing and manufacturers in the state.

We talk to 400 manufacturers across the state, 20-minute interviews. We get some good quantitative data. We use that to inform five focus groups across the state, which gives us a little bit of qualitative background to that. And all of this is available on our website. So anything that we have is open data and usable for all of you.

So I was getting ready for this talk, and normally, my mind was on the holidays. So it went to one of the greatest Christmas movies of all time, right? And it occurred to me that John McClane and manufacturing have a lot in common.

Normally, we're operating behind the scenes. We're doing things that are absolutely vital for the country, and nobody pays much attention to us. We fight for the things we believe in. We take care of those that we love.

But then when the poop hits the whirling dervish, we have to save the day. So think about coming out of the Great Recession. Manufacturing led that. Think about the pandemic, and PPE manufacturing were the folks that responded to that. So I really believe that it's the backbone of the economy and what really keeps us humming as one of the leading nations in the world.

So on to the data. We're going to talk about five things today. The first is most of our manufacturers kind of went, meh, about the economy. Nobody's jumping up and down and saying, this is great, but no one's jumping off the roof either.

It's an interesting thought when they think about their own company versus the economy. They're much more confident about their own company than the world in general. And that's because they have control.

Workforce, we heard a lot about that this morning. We'll give you some data on that. And then, cybersecurity. As we're introducing technology, this is becoming more and more of an issue. It's the first year that it's really been taken seriously by these manufacturers. And then, finally, with the worker shortage that we're facing, we're seeing a lot more technology being adopted in manufacturing operations.

So jumping in, on the economy, this is the first time in our survey that more people said that the economy was not going in the right direction, or the conditions weren't going in the right direction. Dipped below 50%. So they're worried about the uncertainty, and we'll see that come out in some of the numbers a little later.

A little less optimistic than what they were. Now, let's put this all into some perspective. 2021 was a huge year for manufacturers. I mean, factories were full. We couldn't get enough out the front door. And so we're talking about a really high time. So we're looking at these numbers. Just keep that in mind as we go forward. So still, a lot more pessimistic than what they were in the past.

This is the most stable number in the deck. It's stable over years. It's also stable between states. Manufacturers are really a confident folk in their own business.

When we dove into that in the focus groups, they really said, you know, what it is we know our business. We have control over our business, and we're competent. They weren't so sure that was true outside of what they controlled. So really uncertain about whether the folks running the economy or in other parts of the economy really knew what they were doing and were looking out for manufacturers.

We start talking about these three key areas. You can see that the expectations ran relatively flat. These are expectations now, what manufacturers are saying they're going to do in the next year.

So you can see there's a slight shift from last year to this year, slight downward trend. What we're really looking at is, is this a trend? We had that peak in 2021. And we see these three things now trending downward. Is it just that we're coming from this peak? Or are we on a trend that's not so healthy for us?

We ask an open-ended question. What are the one or two things that are really concerning you going forward? You can see the top three, right? Workforce, inflation, and the economy. I would put to you it's all about the workforce.

When we were in the focus groups and we talked about economy, the conversation immediately went to inflation. When we talked about inflation, it immediately went to wage inflation. So I would put to you that the workforce is front and center in most manufacturers' minds right now.

We asked across a range of issues. We asked them to rank them from 1 to 10. One is not so important. 10 is vitally important. We give you the percentage of companies that rank things 9 or 10. It stayed stable. Thank goodness. It's workforce. It's inflation. And you can see the rest of the details as you go along.

What's really interesting is when you start looking at the change, you can see how inflation went up, especially around benefits and salaries. You can see that uncertainty in the middle of the graph there with those two points going up six. And then, finally, we'll talk about cybersecurity a little later, but that took a huge jump up in this survey.

The supply chain, the issues have gone away, or they've gone back to the purchasing department. This is the third time I've gone through the cycle in my career here. We get a crisis. All of a sudden, it's strategic. The C level is involved, and doggone it, we got to know what's going on in our supply chains.

Once the crisis passes, goes to purchasing. Then it's, how can you give me another 5% on what I'm buying from you? And we're going back to that side of the equation.

On the workforce, this isn't changing. We heard the discussion this morning, Herald and Megan talking about how difficult it is to find employees. We're going to underline that. Still 80% say it's hard to find an employee, but we're seeing that softening that we heard them talk about this morning, because the number of employers who say that it's very difficult to find an employee, going down.

If you look at the number of companies hiring, going down. If you look at the number of positions each company has who's hiring, going down. So we see that really softening in the marketplace. It's not a case where people are feeling fine about it, but it's certainly not the desperate situation that it was two years ago.

This is an interesting change that we've seen. In the past, manufacturers were trying to compete exclusively on wages and benefits. Just want to pay them. Well, pay has to be right. We know that.

But if we're looking at Buck's Bar and Grill, and I'm trying to compete with General Motors for an employee, I mean, good luck to me, right? So really, this idea of getting outside of the box a little bit and thinking about other things, like what we heard Harold and Megan talking about this morning. What we're really seeing is much more flexibility than what we saw four years ago.

Four years ago, it was doggone it, I'm giving them a paycheck. Here are the hours they should be here. If they're not here, it's a demerit. Now, it's jeez, you got a doctor's appointment this afternoon? We'll figure out the two hours.

And Megan was talking about her shifts. I was really excited about a company in Wisconsin that had 13 different work shifts until I ran into one six months ago that has infinite number of work shifts. They let the employees determine when they're going to work, as long as the work gets done. So this idea of flexibility coming into how we deal with the workforce is becoming more and more important.

Don't pay attention to the numbers. Pay attention to the shading. We've shaded everything where somebody answered above 50%, where the response was above 50% to these elements. What really concerns me about this chart is that when you're looking at larger companies, they're taking an all-of-the-above approach to attracting and retaining employees. They'll try anything.

Where in the smaller ones, we're still pretty limited on what they're willing to do, which frustrates me because it should be easier for a smaller company to make those adjustments and tailor their approach to individual employees than it is for a larger company. And I think this is a missing opportunity for smaller manufacturers.

No surprise on this slide. Employers expect wages to go up. They expect their benefits to stay relatively the same.

The big change that we saw is a jump in the expected increase in health care. We've seen a big number every year. This is a huge jump for us.

And what we're seeing is every year, I don't have the chart in this deck, but every year we see about 2% of the employers who believe that their health care costs are actually going to go down. And it gets chuckles in the room when we present it. Yeah, right, we know those folks. They're the people who are attacking the issue a little bit differently.

Quick example. One of those folks has a doctor on site. His job is preventative care. You can get something checked out in 30 minutes off of the floor. Your kid needs to go to the doctor? Now, all of a sudden, you're off the floor for an hour as opposed to a half day or a full day.

And then if you have to have a procedure, can you tell the difference between a $5,000 knee replacement and a $250,000 knee replacement? I can't, but that's this doctor's job. Where's the right trade-off? What should we be paying? So I think it's approaches like that, which are going to affect our health care costs. Really, we're going to have to be a lot more open to those kinds of approaches in the future.

Workforce shortage causing more manufacturers to automate. You can see that 64% say this is really an important area to look at. Budget and financing concerns are the number one issue.

What we find is that it's that first investment that's the hardest. If we get one of our companies to make an investment in technology, we'll point him in the right direction. They'll see that ROI, and they'll double down. They're just hooked. Double down. Double down. Double down. But getting them to make that first investment is really, really key.

And to some of the talk about interest rates, boy, balance sheets and manufacturing right now are really strong. And people are able to finance a lot of these things right off of their balance sheets. So in that 35% where they say there are no obstacles, they're not seeing that they have strong balance sheets.

AI-- we asked two questions about AI. We started asking this last year. And this is, do you ever intend to use this? And last year, it was like, I don't want to. You can't make me. I'm never going to do it. 72% of our manufacturers said that, which horrified us. It's come down to 59%.

The second question is, will it impact your industry? Again, oh my god, 51% of the manufacturers said this has nothing to do with me. It's kind of like when I was talking to my dad about-- I was off at school, and I was like, I wrote him a really detailed letter about how it was really reasonable for him to send me more money so I could keep going to school. And I had him on the phone one night and I said, did you get my letter. He said, yeah. I said, well, what did you think? He said, you know, I fail to see how this has anything to do with me.

And that's our manufacturers last year in talking about AI. So we've mashed the two of these together and come up with the AI embracement curve. So if you look at the left-hand side, it's, nope, not going to do it. You look at the right-hand side, it's, we're in. And you could see last year that was a really unhealthy trend.

In the course of the year, we've seen that flatten out. And we're working hard and we're focused on making that tilt the right way. We really think that this is a huge opportunity for manufacturers and manufacturing.

Cybersecurity. This number stayed pretty consistent. It's been about 20% say that they've been hacked. Gave one of these presentations. Some in the audience said, that's wrong. Said, what? He says, 20% know that they've been hacked. The other 80% just don't know that they've been hacked. So this has stayed pretty stable.

The thing that we have seen change this year is that in the focus groups, the manufacturers have gotten a lot more focused, a lot more serious about taking cybersecurity into their business. And one of the things that we noted was that when we asked for a show of hands, every single manufacturer who participated in the focus group either had been hacked themselves or knew someone who had been. And I think that's driven the point home. So we're going to see more and more focus on this. And I think it's very much justified.

And we still think they're overconfident. And we say that because we look at the number, the number is always higher for companies that haven't been hacked than those that have been hacked. If you've gone through the pain, you know what the trouble is. If you haven't it, you're just, OK, we're doing what the sheet says we're supposed to do. And so we keep pushing on this as something that's very, very serious for our manufacturers.

Here's a sign of the economy. Last two years, factories have been full. If you wanted to get a new customer into the factory, it'd mean you had to kick someone out, right? Not so much.

Now, the demand has slackened a little bit. There's room to bring more business into the plant. And we're seeing this in the numbers.

Growth, back to employees, right? How am I going to grow if I don't have enough workers? And then just finding those new markets. So they're really focused in on what does this future look like if I can't find the workers?

So some new questions we've asked on marketing. A lot of companies spending money on marketing. They believe that it's an important part of the way that they go to market. Most surprising number in the deck right here. 43% of manufacturers say that new business comes from word of mouth.

We asked them, is that true? Oh, yeah. Comes from our customers. It comes from our suppliers. It comes from our peers. It comes from people that we know in the community.

I still didn't believe them. So I was listening to a woman for one of the beer companies in Wisconsin. We make beer. We have a lot of beer. The beer companies, and she was talking about experiential marketing, having somebody have a good experience. Substitute that for word of mouth, the numbers are almost exactly the same. So it's causing us to really think about how we approach the market and how we help our manufacturers grow going forward.

Then, finally, we're talking about where they see this growth. We still see predominance of manufacturers focusing on the US. This is a chart that frustrates us. We have ways of helping manufacturers really become strong exporters very quickly.

And we see this opportunity around the globe. It's still not quite on the uptake. And we would like to see that change because we think it would make us more competitive and make our manufacturers healthier.

So what's the bottom line? The economy is stuck in neutral. You heard Dave talk this morning about inventories. Yeah, a lot of our manufacturers saying their customers are working down the inventories that they built up in the recession, but they're expecting a pretty good '25.

This worker challenge is not going away. You look at the demographics anywhere-- anywhere in the developed world, it's really scary. Really scary. We just don't have enough workers. And the implications off of that are incredible. Manufacturers are an adaptive bunch, though. They're taking on innovation and really using that to improve their productivity and improve the abilities of the employees that they have in-house.

AI uptake, really slow, but it's speeding up. We're seeing a bifurcation there where we're seeing manufacturers apply it in two ways. There's a very small group of manufacturers that are applying it directly to the operations.

It's risky. It's expensive. It takes a lot of technology.

Where they are applying it is off the line-- safety manuals. I love the operator manual, Megan. Talking about marketing approaches. When you look at the professions that are expected to go away or be really hit by this, it's not the blue collar. It's the white collar. That's going to be really, really interesting. And then open capacity has let them pursue new opportunities with growth.

Commercial. My commercial. Thanks, Tom, for setting the precedent. We are part of the Manufacturing Extension Partnership National Network. Every state in the country has one of these centers. So this data is about Wisconsin. You can extrapolate as you wish, or you can pick up the phone and call the center in your state.

Our focus is always on helping the small and medium manufacturers stay competitive. And we've been doing it for 38 years. All of this is available on our website. Follow the QR code. It'll get you there.

There's videos if you don't think I talked enough. There's some analysis that you can do on the website to pull out exactly what you want to see. And I welcome you to do that. So thank you.

SPEAKER 1: OK, I am the Pigeonhole administrator for this talk. And Buckley asked me to ask the question. So I actually-- as the administrator I get to ask questions that aren't on here. So I'm going to ask one. I'm the only one who gets to do that.

I think you gave a few examples, but I was wondering if you could give even a couple more examples of what you've heard manufacturers doing, or going more in depth of what you've heard manufacturers doing in their use of AI.

BUCKLEY BRINKMAN: So we're really excited right now because Microsoft has put $3.3 billion in Wisconsin. And one of the things that we're creating up there is the Microsoft AI Innovation Lab for Manufacturing. And we think that with their expertise, we're going to be able to really get some applied applications of AI that we aren't even thinking about right now.

But where we're seeing it is a lot of manufacturers have just been experimenting with it, whether it's OpenAI or one of the other basic models. Ask it a question. It'll write your memo for you.

I mean, I was doing one of these talks, and I thought I was going to do this talk. And it was Thursday and the talk was Friday. I sent the slides into the woman. And she called back, said, this will never do. This isn't even close to what we want. I'm like, crap. It's going to take me four hours to do this. I have maybe 20 minutes here that I can get my head around this.

10 minutes later, I had a good outline of how to present this. And all I had to do was put it in my voice and let her rip. So there are things like that being happened.

What we're looking for now are those bridges to the operation side where we could say, here's a contained spot where we can apply AI on the production line. Here's the technology you need. Here's the know-how you need. And here's what you should expect to happen, so that they can learn about how is this going to really work. And how do we have to adjust our processes to really adopt it and make the most use out of it.

SPEAKER 1: Awesome, great. OK, so we've got a couple questions on Pigeonhole. I'll remind you, follow the QR code. And please put in your questions. We've got a couple of good ones, though.

The first one is going back to the labor force. And it's, is wage inflation a concern across all skill levels or concentrated at a particular level? Were you able to pick up on that in your survey work?

BUCKLEY BRINKMAN: This will have to be more anecdotal than from the data. I mean, the certain skilled positions are still getting a premium. I think Megan touched on that as well.

But everybody is enjoying higher wages. And in fact, our manufacturers have begun to accept a lower standard of their incoming employee. They're going to have to be willing to do more training than what they would normally do. I mean, the number of stories I heard about kids not being able to read a tape measure, phenomenal. You feel like the grumpy old man. It's really cool to be among your people.

But they're really working on how do I make sure that we bring these people in? And that's really sticky now. I mean, if you've got somebody in the house, people are beginning to understand, Buck doesn't do a good job. You probably ought to figure it out because there's nobody out there to replace me, or it's going to be really painful.

SPEAKER 1: Great. Thanks. OK, so next question. We're going to stick with workforce here for a little bit longer. It's from David. You mentioned a top focus is employee development. What type of training and development are manufacturers focused on?

BUCKLEY BRINKMAN: Yeah, they're really looking at growing their own now. I mean, before you could hire that skill off of the street that you needed, but now, it's really working inside the organization and saying, OK, I've got these people. I'm putting this new piece of technology in. How do I get them up the curve to really understand that? And so that's where we're seeing that development.

And you heard Harold talk about engagement. Well, what we're finding is that the places where people are making the best investments are those that really increase employee engagement. How they feel around the job and improve the company.

So the grill days and the baseball games are terrific. What's really interesting is when you get a project team together, analyzing a new piece of equipment, or how they can improve a process, and then letting them make the investment. When you start building that circle, you really start engaging people.

SPEAKER 1: OK, great. So now, we're going to turn to-- there are two questions, really. And I'm going to combine them. Have you seen any examples of re-shoring production whether from Trump tariffs or the Biden stimulus? And I guess that leads to another question, which is just, what do you have to say about tariffs?

BUCKLEY BRINKMAN: It's hard to say anything about what you don't know what's going to happen. So the one thing about tariffs, the one argument about tariffs that I'm hearing right now, which is really logical, but I think has never worked, is that we're going to protect our domestic manufacturing so that they can improve, so that they can become more competitive. It seems like we protect our domestic manufacturing, and it just never quite gets there. So if there's some way to make that other half happen, that might be a silver lining there.

Re-shoring-- we're seeing a lot of near-shoring. I mean, I think as long as we keep this Canada, US, Mexico connection together and also limit the skip-hopping. We're seeing a lot of investment of China right now in Mexico so they can get around the rules. But that's a powerful combination of lower employment rates combined with the higher technology and the more advanced manufacturing in the US. That's really powerful.

During the pandemic, we saw a lot of stuff coming back. Let's just use masks, for example. There are a lot of companies that pivoted to make protective masks. They were getting $4 a copy. Once China opened back up and went back to $0.99, that business went away. I mean, the large manufacturers that we talked to are really willing to go out of their way to help a domestic manufacturer. And all things being equal, they would much rather buy from down the road, but they're not going to take a 20% premium to do that.

It will be interesting to watch what happens around the defense industrial base because the requirements on cybersecurity are going to make it more expensive to play in that field, and smaller manufacturers are going to say it's not worth the effort. And then the other area is all around Build America, Buy America. So if you have a federal contract, you have to prove-- you have to get a waiver that there wasn't anybody in the US that could supply that part. I think that's going to be one place where AI can make a big difference just in the matching. You could see a surge in that stuff coming back.

SPEAKER 1: All right. That's a really interesting answer, especially that last part. I hadn't thought of that. OK, so we've got one more. And then I think I'll turn it over to Daryl and introduce Daryl. But this is an interesting one.

How concerned are manufacturers about the effects of changing demographics on their customer base? And we have an example of younger people don't seem to like Harley Davidson motorcycles anymore. I can't attest to this, but I also, I'm not that young anymore. But yeah, what are your thoughts on the effects of demographics on the manufacturing industry?

BUCKLEY BRINKMAN: It's always been so, right? I mean, one of the reasons the CEO of Mattel got to be CEO of Mattel 25 years ago was the popularity of the Barbie doll. If you watch the demographics of the group that was going through the Barbie doll age, it worked really well for her. But then they got older, and Mattel went down. And there was no answer for it.

So it's always been the same. I don't have a good answer. I mean, it's part of the whole picture of how you go to market. And manufacturers are an adaptive bunch. If there's a way to make it, and there's a way to make it to make money, they'll find a way to do it, so.

SPEAKER 1: All right. Well, thanks a lot, Buckley.

BUCKLEY BRINKMAN: Thank you.

SPEAKER 1: That was great.