U.S. Manufacturers Confront the COVID-19 Pandemic
It is incredible how quickly the world changed for U.S. manufacturers in March 2020. In the first two months of 2020, small and medium sized manufacturers were expressing confidence that despite the burdensome and unnecessary Section 232 tariffs placed on steel and aluminum imports, 2020 would be a good year. In addition to terminating these tariffs, a top concern for many small and medium manufacturers was finding workers to fill the more than half-million job openings in the sector across the United States.
What a difference a few weeks make.
March brought the COVID-19 pandemic and the resulting economic shutdown in almost every state created an entirely new world for manufacturers. Suddenly, manufacturers were forced to shut down either because of stay-at-home order or fears of COVID-19 illnesses among their workforce. Some companies deemed “essential” could not operate because their customers or suppliers in other states were closed because of the different rules enacted by states. The National Tooling & Machining Association (NTMA) and Precision Metalforming Association (PMA) reported that a number of members converted their shops to make personal protective equipment such as face shields.
The disruption was also captured by PMA’s monthly Business Conditions Report. PMA’s April 2020 report showed members predicting the sharpest decline in business across almost every category since PMA began publishing the report in 1979. Eighty-seven percent of survey participants predicted a decline in economic activity during the next three months (up from 31 percent in March). Metalformers also expect a substantial drop in incoming orders, with 82 percent predicting a decrease in orders (compared to 25 percent the previous month). The percentage of metalforming companies with a portion of their workforce on short time or layoff in April spiked to 40 percent, up from 14 percent in March, the highest percentage reported since the 2008-2009 economic downturn. PMA’s May Business Conditions Report showed little improvement.
“Unchartered territory” is the best way to describe the situation that manufacturers find themselves in today. Companies across the country are emerging from the past weeks of unprecedented challenges with resolve to supply the essential parts needed for equipment to fight the virus and the critical components needed to restart the economy.
To get the economy moving again, manufacturers are going to continue to need support and guidance from the government.
First and foremost is to ensure the health and safety of workers. This is the top priority for manufacturers. The Center for Disease Control (CDC) has been an important information source for manufacturers to institute processes to protect workers. The Occupational Safety and Health Administration (OSHA), after a slow start, continues to update its guidance. OSHA must continue to issue clear guidance for companies that is consistent and follows best practices, and Congress should also consider liability protection for employers.
The Small Business Administration (SBA) Payroll Protection Program (PPP) loan program created by Congress provided a critical life-line to thousands of small and medium sized manufacturers across the country. In the first round of PPP loans, more than 100,000 manufacturers received approximately $41 billion in loans, or about 12 percent of the loans disbursed. The loans covered payroll costs, interest on mortgages, rent, and utilities at a critical time. In a survey of NTMA and PMA member companies, 91 percent of the companies reported receiving a PPP loan.
However, when the PPP was designed in March, the economic outlook was much different than it is today, as it was expected that stay-at-home orders would last weeks and not months. Current PPP rules allow loan recipients to not pay back the loan if at least 75 percent of the money is spent on paying wages, salaries, and benefits over an eight week period. This loan forgiveness term should be extended to 16 weeks to help small business owners who need capital for overdue rent payments, to rehire laid off employees, and other expenses. The extended deadline would allow a more orderly return to work.
Congress can also boost manufacturing by creating tax incentives and suspending certain taxes during this critical period. The most controversial — a payroll tax cut or holiday for 2020 — is worthy of consideration and could support companies facing liquidity problems and prevent layoffs because of the pandemic.
To encourage investment in domestic manufacturing facilities, Congress should remove the uncertainty regarding bonus depreciation. Currently, a company is allowed an immediate 100 percent bonus depreciation deduction for investments in short-lived assets like machinery and equipment. This tax incentive is widely used by small and medium sized manufacturers. However, the 100 percent business deduction is scheduled to phase out on Dec. 31, 2022, with complete expiration set for 2026. Removing 100 percent bonus depreciation simply makes no sense at a time when it is important to incentivize manufacturers to invest domestically in the United States.
Also, Congress should consider a new tax credit to support the onshoring of manufacturing activities, such as for moving operations to the U.S. Such a provision could provide an important incentive to companies as they reconsider global supply chains as a result of the pandemic. Similarly, tax incentives to help companies recruit and train the skilled workforce are still needed to expand modern manufacturing in the U.S. When the economic downturn does end, manufacturers will likely face the familiar issue of a lack of skilled workers available to replace an aging workforce.
Finally, terminating the Section 232 tariffs on steel and aluminum imports would have an immediate and positive impact on U.S. manufacturing. To date, the U.S. Treasury has collected approximately $9 billion in steel and aluminum tariffs. Those tariffs are not paid by our trading partners. That money is taken directly out of the pockets of U.S. manufacturers at a time when cash flow is critical. Numerous studies have shown that steel and aluminum tariffs have hurt U.S. manufacturers and have not helped the domestic steel industry (U.S. steelmakers were idling plants and laying off workers even before the pandemic). Terminating these tariffs would enable manufacturers so use the billions of dollars that they are now paying to the U.S. government to instead invest that money in their facilities and hire more workers.