The 2021 Outlook is Optimistic for the U.S. Manufacturing Industry

COVID-19 and the global economic crisis was unprecedented in 2020, and the U.S. manufacturing industry has felt the impact. In May of 2020, the National Association of Manufacturers’ (NAM) second quarter 2020 Manufacturers’ Outlook Survey found that only 34% of respondents expressed optimism about their company’s future. That finding, the lowest since the height of the Great Recession in 2009, reflected just how grim 2020’s series of catastrophes looked to leaders in the manufacturing sector amid supply chain disruptions and sudden shelter-in-place orders that shut down factory floors.

Nevertheless, manufacturers have continued to operate through the crisis and activity has rebounded strongly, with the sector being a bright spot in the economy in recent months. In its first quarter 2021 survey, NAM found that now 88% of manufacturers feel either somewhat or very positive about their company’s outlook. More importantly, this also suggests that manufacturers had the strongest outlook since the first quarter of 2019.

While several indicators suggest some silver linings, there are still a few clouds in the forecast for the U.S. manufacturing sector.  Companies continue to note workforce challenges, supply chain problems, consumer needs and spending patterns have changed, and the biggest factor, the COVID pandemic, remains a powerful global force whose resurgence is uncertain and remaining effects have yet to be realized.

Looking ahead, you may be wondering: What is the business outlook for U.S. manufacturing next year? What should you do now to prepare for next year’s business? What changes should you anticipate with your customers and suppliers once the pandemic ends? What impact will Paycheck Protection Program (PPP) loans have on your tax liabilities?

Let’s start with an overview of the manufacturing industry as we look ahead to 2021.

Better Days Ahead

Although year-over-year revenue is down for most manufacturers, that doesn’t mean profitability has taken a hit.  Many manufacturers have been able to trim costs and continue operations, often at a reduced level, throughout the year. Manufacturers have been proactive at reviewing their operations and cutting costs judiciously. This has allowed many companies to retain employees and only reduced their headcounts for performance-related issues.

Manufacturing businesses overall are surviving through the pandemic, thanks in large part to government loan assistance programs such as the Main Street Lending Program and PPP loans. These programs have kept companies operating and enabled them to retain their skilled workforce and meet critical business expenses. In NAM’s third quarter 2020 survey, 72% of respondents whose businesses were negatively affected by COVID-19 were able to obtain funds to stay afloat through government or other liquidity programs.

The NAM first quarter 2021 survey also found strong optimism for a manufacturing rebound through mid-2021. A sizable majority (90%) of respondents predicted that sales will increase 4.9%, production will grow 4.9%, prices will rise 3.9% and full-time employment will be up 2.7% over the next 12 months. Nearly 33% of respondents said that their revenues had recovered by the end of 2020, and overall, 67.6% of manufacturers completing this survey anticipate that their revenues will be back to pre-pandemic levels by the end of 2021.

Sales Backlog Likely in 2021

The manufacturing outlook for 2021 is mixed, and the recovery will be uneven across the industry.  Some manufacturing subsectors will bounce back fast, while others will struggle to recover from a difficult 2020.  Aviation is expected to have a second-quarter 2021 comeback as more people are vaccinated and begin to travel again, whereas other sectors such as fluid power companies have experienced general weakness, which may indicate pent-up demand.

Many manufacturers anticipate seeing a sales backlog in the second half of 2021 as business recovers. Companies have seen sales volumes fall and rise rapidly, so it is best to plan ahead now in anticipation of a rapid increase in sales. Manufacturers should review their investment strategies for machinery and equipment, staffing, research and development expenses and new product development.

To plan ahead for an increase in sales, manufacturers should consider these questions:

• • How many orders do we currently have?
  • How have orders been trending?
  • Do we have the materials on hand to meet a backlog?
  • Do we need to make any special arrangement with our suppliers? Can we meet our “safety stock” level requirements?
  • Have customer delivery requirements changed? Can we meet delivery dates?
  • Do we have the employees we need to meet increasing sales demand?
  • Is our distribution chain ready to meet increasing volume?
  • Should we change our pricing strategy?

Tax Considerations for PPP Loans

We saw a number of COVID-19-related tax changes in 2020. These included increased and accelerated deductions, loosening of the business interest expense limitation, enhanced deductibility of charitable contributions and the ability to carryback net operating losses. Business incentives included payroll tax credits, payroll tax deferral and PPP loans.

The PPP loan program provided relief to more than five million businesses during the pandemic. Many PPP loan recipients can have their loans forgiven in full if the funds were used for eligible expenses and other criteria were met. The IRS has provided guidance on the process and the SBA opened a forgiveness portal last August to facilitate the process. In addition, the “Consolidated Appropriations Act (CAA),” signed into law on December 27, 2020, overruled the Internal Revenue Service’s position that the expenses associated with PPP loan forgiveness were not tax deductible. The CAA ensures that PPP loans are tax-free, and all associated expenses are tax deductible. In addition, the CAA extends this treatment to Economic Injury Disaster Loan (EIDL) Advances, as well. PPP borrowers should work with their tax advisors to navigate their strategic tax planning this tax season.

Additionally, recent extensions and enhancements to the Employee Retention Credit (ERC), a tax benefit included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act aimed to help employers keep employees on their payroll during the pandemic, makes this incentive more readily available to employers for the last three quarters of 2020 and now through to the end of 2021. To learn more about the changes to the ERC and to see if you are eligible, check out our Employee Retention Credit Guide.

Given the continuing pandemic environment, we will continue to keep manufacturers informed of legislative matters regarding economic relief for dealing with the COVID-19 pandemic. We also will continue to provide guidance and recommendations on easing cash flow and preparing for uncertain times.