Manufacturers are operating in two competing realities.

With the exception of a few sectors, the industry overall is experiencing a resurgence. U.S. manufacturing is back, and in a big way. Record-setting orders will keep most sectors busy through 2023, and ongoing expansion is forecasted for at least the next 18 months.

But in this era, higher demand is not necessarily translating to higher profits. Labor shortages and supply chain disruptions have created unprecedented hurdles to fulfilling orders. Those same challenges will continue to dog the industry in 2022. Small and middle-market manufacturers will especially feel the pinch of rising costs for goods and wages. And a tax increase on the horizon is likely to put a chill on industry reinvestment.

So while it’s a great time to be in manufacturing, it may not feel like it. The good news? Manufacturers have a number of options to alleviate some of the pressure. Their best strategy is to dedicate time and resources to preparing for the trends that will most affect their business in 2022.

2022 manufacturing industry outlook

Here’s what to watch for in the coming year:

Ongoing labor shortages

The industry was grappling with a skilled and unskilled labor shortage before the pandemic hit. Now, it’s a crisis. To fill this gap, manufacturers will need to mine nontraditional sources for talent. Some companies are finding success snapping up people from other industries, such as the hospitality sector, that were hit hard by the pandemic. Business owners that look further afield to find the right people — and invest in the training to get them up to speed — will find they have an edge.

Supply-chain woes

The speed and extent to which supply-chain disruptions were compounded in 2021 blindsided many in the manufacturing and adjacent industries. Unfortunately, manufacturers can expect higher costs and roving scarcity of materials well into 2022. Improving operational efficiency will be key to offsetting inflation, but manufacturers may still need to pass higher costs on to their customers.

Rethinking inventory

Supply-chain disruptions are also influencing how manufacturers make purchasing decisions. Just-in-time inventory is being eclipsed by just-in-case stockpiling as companies buy up raw materials and key components to safeguard production schedules. Manufacturers will need to invest more time in sourcing and stocking the right materials to mitigate delays in production.

Accelerated digital transformation

Digital transformation is poised to grow exponentially as manufacturers retool operations to maintain their competitive advantage. Industry 4.0 capabilities, data management, robotics, machine learning and other aspects of digital transformation will soon be table stakes just to compete for customers and talent. Companies that haven’t developed a digital transformation strategy should start planning now, before their hands are forced and decisions are rushed.

Tax increase on the horizon

The Build Back Better Act is designed to expand the social safety net and fight climate change, but it will likely put a chill on the future of U.S. manufacturing. No matter what form the final bill takes, manufacturers will be looking at a tax increase starting next year. That will mean less cash on hand for recruiting, hiring and retaining staff and for investing in capital equipment.

Trade wars continue

The trade wars are here to stay, at least for now. The Office of the U.S. Trade Representative may provide some tariff relief to specific sectors or companies. However, the industry as a whole should assume tariffs will stay in place for the next 12 months.

Reshoring remains steady

Efforts to bring manufacturing back to U.S. shores will remain strong in 2022, especially as supply chain issues continue to snarl global trade. By bringing production closer to home, manufacturers can strengthen their resilience to global shake-ups and capitalize on Made in America pride.

Innovative problem-solving

While the industry as a whole is facing some significant headwinds, middle market and small manufacturers are at a particular disadvantage. These companies have fewer resources for weathering wage and material inflation than many of their larger competitors.

As a result, they will need to invest in technologies and strategies that will enable them to do more with less, from investing in automation on the shop floor to partnering with trade associations that can expand their purchasing power. No doubt, the coming year will deliver innovative solutions that will power the industry for years to come.

Mike Devereux, CPA, CMP, Partner, WIPLFLI