The Future of Manufacturing

The U.S. Economy’s Turning Point

The U.S. economy is at a pivotal point. Inflation, although well below its 9% peak from 2022, is still above the Federal Reserve’s 2% goal. The Fed lowered interest rates less than expected last year, and estimates for this year continue to move lower. The Fed is in no rush to cut rates with growth near 2%, inflation steady, and the labor market holding up. This leaves the Fed in a “wait-and-see” mode, leaving rates above neutral for the time being. Meanwhile, growth is flattening out to 1.5%-2%, below the +3% expansion we have seen over the last couple of years. Slowing growth and higher (but manageable) inflation begs the question of stagflation: Should the Fed cut rates to spur growth (with the potential of increasing inflation), or hold rates steady to combat inflation while potentially hurting growth? We have stated many times that our preference is higher growth with higher inflation (2-3%), as this is better for corporations and the consumer. But with tariff fears dissipating, consumer confidence surged to 98 in May, a 12.3-point jump from April’s five-year low of 85.7, while the forward-looking expectations index experienced a substantial 17.4-point climb to 72.8. That said, with confidence in the economy rising, what if there is a way to increase growth while decreasing inflation?

Artificial intelligence (AI), technological progress, and automation can likely help solve this problem. The annual labor productivity growth rate for the U.S. economy is ~1.5%. In the 1990s and early 2000s, the productivity growth rate rose to nearly 3%, thanks to computers seeing a broader acceptance across the economy, 15 years after their creation. The combination of rising productivity and falling inflation in the U.S. economy has occurred only once on a sustained basis in the last 50 years, and we could be on the precipice of similar developments today. AI has the potential to create a real economic impact before the end of the decade, in half the time it took computers to realize productivity in the economy.

Chart 1: AI Productivity Growth May Appear in Half the Time as the Internet^[1]

AI advancements will be felt all across the economy. Three main areas can be used to visualize the impacts: data centers, semiconductors, and power. Data centers house servers and networking equipment. With data centers comes real estate and construction, as well as the parts and accessories needed to operate the data centers. Semiconductors are what bring AI to life and run the data centers and technology. Lastly is power. For semiconductors and data centers to operate, electricity and new forms of power generation are needed, along with ongoing maintenance. Although AI may seem just as one area of the market, it spans many sectors and industries and will ultimately have an impact on every corner of our economy.

Chart 2: Visualizing How AI Will Flow into Different Industries^[2]

Where are These Advancements Being Seen?

In industries such as food and beverage, home and personal care, and life sciences, companies using automation technology see improved throughput, reduced labor intensity, and enhanced quality control. Moreover, companies in the industry have recently announced partnerships with NVDA to bring AI to autonomous bots. The bots are meant for use in manufacturing facilities to boost warehouse efficiency and lower labor needs. Amazon (AMZN) and DHL Supply Chain both utilize the technology in their warehouses, along with many other automation technologies. The new partnership with NVDA adds to recent deals with mega-cap tech companies. Last year, partnerships with Microsoft (MSFT) were announced to add OpenAI software to industrial automation cloud platforms.^[3] Manufacturing/automation companies are partnering mega-cap technology companies to improve processes, add AI to its offerings, and bring efficiencies to the manufacturing industries.

Industry 4.0 or “smart manufacturing” refers to the digital transformation of how companies manufacture, improve, and distribute their products.^[4] Machine learning, computer vision, and natural language processing will improve many steps in the production and manufacturing processes. One of the areas where AI could have the largest impact is predictive maintenance, AI systems that can forecast and catch failures before they occur. This will help improve supply chains, reduce downtimes, and lower costs. Overall, AI advancements will improve automation, machinery, and factories – “smart manufacturing” will be here before we know it.

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Sources:

^[1] Source: JP Morgan. As of July 16, 2024.

^[2] Source: JP Morgan. As of July 16, 2024.

^[3] Source: Manufacturing Dive. As of June 12, 2024.

^[4] Source: IBM. As of May 25, 2022.

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