How does a manufacturer for manufacturers view today’s economy?

The manufacturing sector has been in a bit of a haze as of late — it registered a third straight month of contraction in January.

It’s a sign that interest rate hikes by the Fed and decreased demand may be taking a toll on a sector that’s already experienced supply chain difficulties and a tough labor situation. Meanwhile, the Biden administration has been trying to revive America’s industrial might through major pieces of legislation like the Inflation Reduction Act and the CHIPS and Science Act.

So, what does the economy look like nowadays for manufacturers? For Rockwell Automation, a company that is simultaneously a manufacturer and a service provider for companies wanting to automate their workforce, order backlogs and the prospect of government funds on the horizon are buoying the view of the economy at the firm level.

“The manufacturing sector is continuing on reasonably strong,” said Rockwell Chairman and CEO Blake Moret in an interview with Marketplace’s David Brancaccio for our ongoing Economic Pulse series. “First of all, you look at some of the specific parts of manufacturing and they’re building out their capacity in really what is a once-in-a-generation kind of investment.”

The following is an edited transcript of their conversation.

David Brancaccio: You make stuff factories use to make stuff, also software, you’re a service provider. Just give us a taste of the types of work that Rockwell Automation does.

Blake Moret: Sure, well think of all the production processes across the broad spectrum of manufacturing and production industries, everything from making electric vehicles, to baking bread, to making medicine, to producing energy and all its sources. And when you think about those production processes, Rockwell — with our Allen Bradley hardware brand and our software and our services — serves a little bit like the conductor of the orchestra that sits in the manufacturing site, bringing all those different pieces of equipment together to be able to produce at speed, at scale, with quality and with the information going back to the organization so that they can do it even better the next time.

Brancaccio: And see this is one of the key reasons I want to take the opportunity to talk to you: you are uniquely situated to get a sense of the rhythm of manufacturing — they are your customers. So for the U.S. with these rising interest rates, what are you seeing out there? What’s the landscape here in February?

Moret: So the manufacturing sector is continuing on reasonably strong. And I think, you know, for a couple of reasons. First of all, you look at some of the specific parts of manufacturing. And they’re building out their capacity in really what is a once-in-a-generation kind of investment. So the carmakers are building out electric vehicle and battery capacity, because they all have fear of missing out. The semiconductor manufacturers need to build out their capacity with a special focus on the U.S. In general, because of scarce labor and manufacturing jobs, people are turning to technology to complement the resources — the people — that they do have.

Brancaccio: So it’s interesting, because you talk to people who do the ordering at factories, and they’re saying, “Oh, we might be seeing some contraction.” But you have a slightly longer-term view, because you’re talking to people who are building a new factory.

Moret: Well, it’s that and it is also keeping it running. And even if orders moderate, many of us have — because we are in our own right a manufacturer ourselves — we’re seeing such large backlog that just shipping that and returning to, let’s say, a pre-supply chain constraint lead times, is keeping our shipment and our financial performance strong, even as your orders moderate a little bit as those times return to normal.

Brancaccio: That’s really interesting, right? I mean, this notion that everything’s all worked out in supply chains, it’s all going back to equilibrium, you’re saying, well, we’re still seeing some of the residual effects in a way that’s accruing to your benefit.

Moret: From a financial standpoint, it paints a strong picture for the current year and beyond. But we’re not out of the woods yet. There are still supply chain constraints. And as you can imagine, all products don’t return to fully-recovered lead times at the same time as semiconductor chips and other constraints still have to improve a little bit further.

Brancaccio: And you fold in government policy here, parts of what’s dubbed the Inflation Reduction Act is supposed to bring renewable energy jobs to the United States. And in some cases, that’s installing solar panels, but in a lot of cases it means making stuff for that energy revolution, and that may need some of Rockwell Automation’s gear.

Moret: We’re already seeing some benefits from the IRA. I think it’s spurring additional investment in renewables. We saw some orders for some greenfield plants that were helped by the IRA. We also see with the focus on some of the provisions of the IRA on U.S. content, Rockwell is a strong manufacturer with thousands of manufacturing jobs in the U.S. And so we’re a beneficiary for those reasons as well.

Brancaccio: Then you mentioned about we shouldn’t forget the other one, the CHIPS Act, to spur domestic production of semiconductor chips.

Moret: That’s right. And I think it’s very important for the U.S. to take a multi-year view of building that capability. Semiconductors are foundational to so many things. We know that they are for, you know, our consumer devices, PCs and phones and so on. We know it’s important for defense, but you can’t bake bread at scale without the automation equipment that is powered by semiconductor chips. You can’t produce billions of vaccines a year without those semiconductors. And so not only building the fabs but recreating the infrastructure that supplies those fabs is essential. It’s not going to happen overnight. It’s a multi-year job. But it’s important.

Brancaccio: I wanted to ask you about, I don’t know, I guess I’ll call it the paradox of automation. When machines do the work, what happens to the human who did it before? I realized companies like yours, hire people to make the automation and your jobs are thought to be better jobs. But it’s not a one-for-one swap, you don’t always just have the woman who lost the job because the machines do it better get a job making automation.

Moret: Upskilling is absolutely essential. And I’ll just start with an example. Rockwell is adding jobs, we’re significantly bigger in terms of total headcount than we were a few years ago, because we think the winning hand is trained people, highly-engaged and enabled people working alongside the technology. And the technology, in some ways, gives those people superpowers. We have programs that were helping manufacturers as well do the same thing. For instance, we have our Academy of Advanced Manufacturing, where we offer free of charge to returning service people who are returning to civilian life. The hands-on training that in 12 weeks can give them technician-level skills working in manufacturers all across the U.S.

Brancaccio: This is the Academy Advanced Manufacturing that you run — what’s the scale of that? How many people do you run through that?

Moret: So we’ve graduated over 300 people in the last few years. And importantly, we’re working with community colleges to scale that even further. And if you’re one of those people whose lives have been changed by this offering, then that’s pretty significant.

Brancaccio: Now I ask the following question of as many economists as I can find, but I also need to run it past a CEO like yourself: are you worried we’re gonna get a recession this year with these higher interest rates?

Moret: There’s no question that inflation remains high. And even though the pace of increase has slowed, it’s still at a high level. And we’re seeing it impact consumer-facing parts of our business, most noticeably, the buildout of e-commerce fulfillment centers. But in general, again, going back to that backlog, there’s a lot of orders that need to be shipped out. And so even if we see a shallow recession this year, I think a lot of us in the manufacturing business are going to continue to see pretty strong results. I would also say with unemployment remaining so low, that’s also a positive read.

Brancaccio: Yeah, it’s hard to even ask about recession, given where we’re seeing — the unemployment rate most recently was the lowest since May of 1969. That’s probably the lowest in your lifetime.

Moret: Yes. And I’ll tell you, we also look at our own behavior, again, as a manufacturer ourselves, and we’re continuing to invest. The day that we pull back on our investment, which has not happened at this point, then you can bet that hundreds of our customers have probably arrived at a similar decision, you know, within the same few weeks.

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