U.S. manufacturing's rebound is lopsided
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American manufacturing is showing signs of revival. But the recovery is being powered by industries at the forefront of the AI and energy boom while the traditional factory sector gets left behind.
Why it matters: The White House is touting a revival in American manufacturing as evidence that its economic agenda is working.
- But a lopsided recovery raises questions about how much of the sector stands to benefit — especially as higher borrowing costs threaten to weigh on factories once again.
Zoom in: Factory output rose 0.3% in September despite a 3% drop in auto production — the latest evidence that the long-struggling sector is gaining momentum.
- The Institute for Supply Management's manufacturing index showed a ninth straight month of expansion, with new orders growing at a faster pace and backlogs of unfinished work mounting.
Yes, but: The pickup in the headline manufacturing sector is not translating into hiring across the board.
- Last month, five of the six largest manufacturing industries reported rising new orders, but only two — computers and electronics, and transportation equipment — reported increased employment, ISM said.
The striking split is evident in the hard employment data, according to an analysis by Gad Levanon, chief economist at the Burning Glass Institute.
- U.S. manufacturers added a net 40,000 jobs over the 12 months ending in September. But the gains came entirely from advanced manufacturing — even though the subset accounts for just 38% of factory employment, Levanon wrote.
- Those industries — including chemicals, machinery, computers and electronics, and transportation equipment — added 56,000 jobs over that period. Every other manufacturing industry combined lost 16,000 jobs, offsetting part of those gains.
- Employment outside advanced manufacturing is barely above its 2016 level, reflecting years of stagnation across much of the factory sector.
What they're saying: "So the manufacturing recovery is real, but it is narrow," Levanon wrote.
- The recovery is "happening in the industries that make the equipment for the AI and energy buildout and in the ones most affected by reshoring. The rest of the factory sector is not hiring, and I don't expect that to change soon," he added.
What to watch: The Fed's latest tightening cycle could widen the divide between American manufacturers before threatening the recovery itself, James Knightley, chief international economist at ING, tells Axios.
- Traditional, labor-intensive producers are already struggling with high costs and foreign competition. Advanced manufacturers, meanwhile, are benefiting from an AI and energy investment boom that could help sustain growth despite higher borrowing costs.
- If borrowing costs keep climbing and investors begin questioning tech valuations, even the advanced industries driving the recovery could come under pressure.
- "This need for external financing creates a vulnerability that could translate into a slowdown in the sector," Knightley says.
