A YEAR OF CHALLENGES |Part one|
To begin, I must be candid: 2024 has been an exceptionally challenging year. I have witnessed the devastation of family businesses and the obliteration of people's livelihoods. Meanwhile, manufacturing continues to be neglected by the economists managing our economy. Despite claims of a "strong" economy, I contend that we are, in fact, in a recession and have been for at least the last nine to twelve months.
As a company, we engage with approximately 250 businesses across Minnesota, North Dakota, and Wisconsin, in addition to a significant portion of our business coming from the national market. One of my favorite things to do is listening to our customers—understanding their current endeavors, future directions, and upcoming projects. It fills me with immense pride to know that we empower companies, both small and large, to achieve what they could not accomplish independently.
Throughout 2024, a common narrative has emerged from our customers: "Things are slow, and interest rates have halted or canceled our plans for 2024. The future of federal policy remains uncertain." This sentiment has been echoed across all industries, indicating a widespread slowdown and less optimistic view of their markets.
“we have termed the current market situation as the “pandemic hangover.””
Is this phenomenon regional? I would like to believe so, but it is not. In November, I had the privilege of taking the place of one of our account executives at a trade show in Tennessee. Trade shows are invaluable for gauging market trends from both the supplier and customer perspectives.
During conversations with several attendees, who could be considered competitors (though we must support one another in the industry rather than erect barriers), I found that they echoed the same sentiments we have encountered throughout 2024: sluggish sales and customers postponing their plans. Attendees shared our rationale for participating in the trade show—seeking new ways to engage with potential customers, as their existing customer base was not providing the necessary support to sustain their businesses. This narrative was consistent across the board.
“costs escalated during the hyper-stimulation of the pandemic”
When can we anticipate a change on the horizon? The debate remains unresolved. The recent decision by the Federal Reserve to reverse course on rate reductions is unlikely to ameliorate the situation for the manufacturing sector. Capital expenditure investments (CAPEX) for most businesses remain unfeasible due to the elevated cost of capital, with industrial and agricultural markets being the most affected.
Geopolitical issues abroad have exacerbated the situation, failing to drive up core commodity prices to sustainable levels. Commodities such as corn, soybeans, and other key agricultural exports remain below 2023 rates, thereby reducing farm incomes while input costs continue to rise.
Why focus on agriculture? Whether or not the economists at the Federal Reserve or market analysts on Wall Street acknowledge it, agriculture remains a cornerstone of the United States economy. The "real" economy is not driven by the latest cryptocurrency surge or the stock performance of tech companies pursuing advancements in artificial intelligence. While these factors may influence the stock market, the average consumer and business are largely unaffected by them.
Agriculture is fundamental because it sustains us all; every food item we consume originates from the farm in some form. If the agricultural sector struggles, the broader economy suffers. In our industry, particularly within our regional markets, agricultural manufacturing is the core of what is manufactured here. From attachments to fully tractors, much of this manufacturing occurs in the Midwest. When farmers are unable to invest in new equipment, it is the manufacturers in this region who bear the brunt of the impact.
Often, we focus on the prices of eggs, meat, or bread in the grocery store, assuming these prices should remain relatively stable and only increase minimally in line with base inflation. However, the reality is that input costs for farms have risen significantly, and these increases are largely irreversible.
These costs escalated during the hyper-stimulation of the pandemic, which drove up the costs of labor, equipment, land, and capital, all predicated on the expectation of sustained long-term demand. As we approach the five-year anniversary of the pandemic's onset, many of these costs have become permanent. Labor costs remain elevated, and the cost of capital is high compared to the preceding decade.
These higher input costs render American farm products and manufactured goods less competitive on the global stage. How can farmers reduce input costs when labor and capital expenses remain high? This situation is indeed inflationary, but what is the underlying cause?
Internally, we have termed the current market situation as the "pandemic hangover." This encompasses idle excess capacity, elevated input costs, and diminished demand for both our products and those of our customers. The increased input costs faced by our customers force them to raise prices, leading to reduced demand and lower sales volumes. This creates a vicious cycle of financial strain and underutilization of capacity, resulting in economic stagnation.
“The time for a more aggressive loosening of policy from the Federal Reserve is long overdue.”
Breaking this cycle is imperative for the economy to return to normal performance levels. The catalyst for this change remains uncertain. However, threats of tariffs on our allies, such as Canada, Mexico, and the European Union, will exacerbate the situation rather than alleviate it. Such measures would increase input costs, raising the cost of doing business in America, which is inherently inflationary and would likely prompt the Federal Reserve to raise rates further, thereby increasing input costs for all.
The consumer is struggling. While it may appear that the consumer is healthy, this is true primarily for the wealthy who have well-invested portfolios and have benefited from a record-high stock market. The average consumer, however, is suffering as wages have not kept pace with inflation. Although corporate greed is often blamed, non-tech companies frequently lack the capacity to make significant wage adjustments due to falling demand and rising input costs. This situation does not stimulate demand for end products, perpetuating the cycle of stagnation that must be broken.
How do we emerge from this situation? The time for a more aggressive loosening of policy from the Federal Reserve is long overdue. This could initiate a gradual return of demand. Both individuals and businesses require relief, and federal policies should support domestic enterprises rather than burden them with additional regulations and costs. We need a Federal Reserve that serves the needs of the American people, facilitating progress rather than hindering it.
Coupled with stable economic policies that incentivize manufacturing, this approach will strengthen the United States, not only for its citizens but also as a dominant global power. Manufacturing is crucial for a robust America, contributing to both financial and national security.
Bemidji's most inspirational sign of the year
As we look ahead to 2025, I remain optimistic that change is on the horizon. We have weathered adverse times before. While time will ultimately reveal the outcome, America needs a renewed sense of optimism. As a nation, we possess unparalleled strengths and opportunities; it is time we leverage them to their fullest potential.
