The US economy as a whole has been consistently surprising to the upside, but the manufacturing sector has been languishing. Even so, a growing belief in a soft landing and the potential for significant interest rate cuts could bring renewed vibrancy to the sector. Politics, trade and policy missteps are all potential threats to be aware of. That's read by ING.
US manufacturing is a highly diversified sector that contributed $2.9tr to GDP in 2023, equivalent to just over 10% of all economic output. It also employed 13 million people, accounting for 8.3% of all US jobs. The sector can be split into two broad groupings. Firstly, there is final products & non-industrial supplies, which represents 54% of manufacturing output and includes the likes of cars, furniture and computers. The other 46% are classified as "materials", which includes the production of items such as textiles, paper, steel and manufactured parts that go into the former category of final products.
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Pandemic plunge followed by a 2021 rebound
The Covid pandemic heavily disrupted the US manufacturing sector, with output falling nearly 20% between February and April 2020 as the economy went into lockdown. Lingering supply chain disruptions resulting from Covid containment measures plus strained freight capacity both at home and abroad meant that it wasn't until November 2021 that output volumes fully recovered.
Nonetheless, in an environment of strong consumer demand for physical goods – caused by fiscal support via stimulus payments and extended and uprated unemployment benefits, plus cheap financing conditions – pricing power increased significantly for manufacturers and profitability generally increased. With the ability to spend money on leisure and hospitality severely constrained, retail sales swung from taking 42% of all consumer spending to 47% in just a couple of months.
Tougher times since 2022
The situation has changed significantly over the past two years, with official data showing that manufacturing output has stalled since early 2022. The Institute for Supply Management's (ISM) widely watched manufacturing survey is even more downbeat, indicating contraction for 16 consecutive months.