November 2022 Volume 4

OPERATIONS & MANAGEMENT

Exploring the Impact of a Potential Recession By Ian Stringer

Results of FIA’s Orders and Shipments Survey (O & S) through August 2022 are in and reveal some interesting insights. First, the index value for August’s forging shipments touched a record high of 203.9 adding to the 2-year trend that took root in the aftermath of the last economic recession. Second, August 2022 is the first time since late 2020, forging orders have slowed enough to nearly intersect with the shipments index. This also coincides with the timing of the last recession that began in March 2020 where order bookings fell over 35% between February and April of 2020. Finally, throughout the peaks and valleys during 2022, bookings are relatively flat which may indicate something more systemic at play. Prior to the spring of 2020, there was a balance between forged product order bookings and shipments. This coincided with relatively stable forged product prices and low inflation throughout the economy. Since then, orders have severely outpaced shipments leading to a huge backlog of unfilled orders. This phenomenon appears in almost every industry and parallels the appearance of very high inflation which has caught the attention of the Federal Reserve. It is unclear whether orders that have outpaced shipments is caused by demand pull, supply constraint, or perhaps the confluence of the

two. What’s important now is that the Federal Reserve is addressing inflation through aggressive monetary policy. The Fed is trying to stamp out inflation by raising interest rates. This makes borrowing more expensive and thereby slowing demand which has the desired deflationary effect on prices. The Fed hopes they can produce a “soft landing”, but risk pushing the economy into recession if rates rise too much too soon. In either case, the economy is not likely to expand while the aggressive monetary policy continues. The levelling of 2022 orders for forged products, as indicated in Figure 1, may be early evidence of the consequence of the Fed’s actions. Suppose the general economy were to slip into a recession, what impact would that have on the Forging market? The O & S survey data only spans as far back as January 2019 exposing only one reference for how the forging market was impacted during the last recession in 2020. Instead, we’ll look at a different data series as a proxy for forging market activity over earlier recessions. Figure 2 overlays Industrial Production (IP) for the forging and stamping industry upon historical recession markers. The data shows IP for

Figure 1: Historical Orders and Shipments for All Forged Product Categories Source: FIA O& S Survey

FIA MAGAZINE | NOVEMBER 2022 66