Interest rate volatility has significant implications for manufacturing companies looking to access capital. The probability of a lengthy pause in any prospective changes to the federal funds rate and volatility in long-term interest rates presents a daunting challenge for firms attempting to map out hiring and capital expenditures over the next two years. Moreover, the regime change in interest rates and inflation—or higher for longer rates and inflation—compared to the pre-pandemic era implies a permanent increase in the cost of doing business which reduces the margin of error for firms when making allocation decisions to support business expansion.
The implications of that regime change are considerable. With a policy rate standing in a range between 4.25% and 4.5% and a long-term rate trading between 4.5% and 4.7% recently alongside improved access to capital via the domestic banking system, we expect that many manufacturing companies that have been in a holding pattern on spending and investing will start turning things around, especially through debt or refinancing.
The number of mentions of access to capital in public filings for industrial companies has significantly declined since Q1 of 2024 and the mentions of new debt and debt amendments increased in Q4 of 2024, according to Bloomberg.
Kendra Blacksher, RSM US LLPExpectations around borrowing rose in Q1 2025, with 43% of executives indicating their businesses will take on more debt over the next six months, according to the RSM US Middle Market Business Index Survey (MMBI), ticking up from 39% in the previous quarter.
Manufacturing companies taking on new debt or refinancing existing debt should be mindful of any new or changing debt covenants to ensure they align with their financial targets and would not pose a threat of the debt being recalled in the future. Debt modification and restructuring—or entering into new credit facilities—may come with complex accounting implications, such as the treatment of costs incurred and the disclosure requirements for significant terms of the facility and costs incurred, to name a few.
Capital Access and Deployment
Understanding the dynamics of interest rates is crucial for manufacturers deciding whether to borrow or refinance.
Kelly Cleary, RSM US LLPShort-term interest rates, influenced by central banks and set by the private market, affect the cost of borrowing for immediate needs and operational expenses, making it cheaper for manufacturers to finance short-term projects such as equipment upgrades, process improvements and inventory management systems. In Q1 2025, there was a notable pickup in inventory levels among manufacturing companies, with 48% of middle market companies reporting increased inventories, according to the MMBI report.
Companies are likely to allocate additional capital to maintaining and managing these inventory levels; 62% of MMBI respondents in Q1 expected inventories to rise over the following six months. For some manufacturers, this may include investments in warehousing, logistics, and supply chain management technologies. Companies should also revisit inventory reserves and associated methodologies and calculations. Increased inventory levels could impact inventory turnover, which will have broader implications to financial metrics and costing models.
Long-term interest rates, influenced by factors like inflation expectations and economic growth, affect financing for more extensive infrastructure projects and plant expansions. The term premium, the additional yield required for holding longer-term bonds, reflects the risks associated with long-term investments and affects the overall cost of long-term borrowing. Higher term premiums result in higher borrowing costs, stricter lending requirements, and higher discount rates. The term premium has moved into positive terrain over the past few months and is likely to remain there or increase. This is at the heart of the regime change in interest rates we have addressed over the past three years.
Together, these factors shape manufacturers’ access to capital and influence their investment strategies and deployment of capital. Companies may decide to refinance sooner than later to lock in these lower rates. Significant considerations for refinancing debt include properly accounting for the refinance, including the treatment of existing unamortized costs and the treatment of new costs to obtain the refinancing.
M&A, Labor and Technology
For companies exploring opportunities, key areas of investment are likely to include new technology such as artificial intelligence, mergers and acquisitions, talent acquisition, and product and plant expansions. Fifty-four percent of MMBI respondents reported an increase in capital expenditures and investments in the first quarter of 2025, and 69% said they intended to increase spending on those items in the following six months, according to the MMBI.
The M&A outlook for the manufacturing sector is set to improve as the recovery in the Institute for Supply Management’s purchasing managers’ index and new business inflows boost investor confidence, leading to more attractive valuations and increased M&A activity. The U.S. manufacturing PMI increased to 50.9 in January 2025, rising above the threshold for the first time since October 2022. A PMI above 50 alongside rising long-term interest rates indicates a more optimistic economic environment and reflects investor confidence. It’s also worth noting that the U.S. PMI is beginning to rise above global PMI, indicating strength in the U.S. manufacturing sector.
Institute for Supply Management; RSM US LLP
The labor market remains tight, with ongoing challenges in attracting and retaining skilled workers. The manufacturing sector saw a 2.7% unemployment rate over the last year, below the pre-pandemic level, according to the Bureau of Labor Statistics report for December. Additionally, open manufacturing jobs increased by 8% over the past five years, rising to 791,000 in January. In the third quarter of 2024, labor productivity in the manufacturing sector increased by 0.9%, per the BLS, indicating improved efficiency and technological integration. However, unit labor costs also rose by 1.7% in the same period, suggesting that while productivity has improved, the cost of labor per unit of output has also increased, impacting profit margins.
Manufacturers will need to find the balance between increased automation and personnel to maximize their production capacity while also managing costs. As manufacturing sector companies shift focus to automation to meet demands and combat the difficulties in acquiring talent, it’s important to keep the associated accounting implications in mind. Companies should review costs for developing and acquiring new technology to ensure they are properly classified within the financial statements, given different cost types call for different classification and accounting treatment. In addition, as companies look to hire top talent, they must ensure they have strong hiring processes and controls in place.
The Takeaway
The combination of recent interest rate cuts followed by a lengthy pause in any prospective changes to the Federal Funds policy rate2 and rising long-term interest rates present both challenges and opportunities for industrial companies. By understanding the accounting implications of debt restructuring, making strategic investments in technology and expansion, and staying informed on economic policies, manufacturers can navigate these changes effectively. Companies that remain proactive and adaptable will be better positioned to leverage their access to capital and drive innovation.
About the Authors
Kendra Blacksher is an assurance partner and industrials senior analyst at RSM US LLP and Kelly Cleary is the industrials audit policy leader and a senior manager at RSM US LLP. For more information, visit www.rsmus.com.