US Manufacturing Renaissance Remains an Illusion: Alpine Macro

The resurgence of U.S. manufacturing has become a significant topic in political discourse in recent years, with leaders promising to restore the industrial strength that once defined the American economy.

Both the Trump and Biden administrations have rolled out ambitious initiatives aimed at bringing manufacturing back to the U.S., including tariffs, tax incentives, and substantial government investments, according to analysts from Alpine Macro.

However, U.S. manufacturing has been on a gradual decline for decades. In the early 1970s, manufacturing value added constituted 23% of GDP, while today it is around 10%. Although a few key sectors have shown some improvement, median output across various industries has declined by 20%. This suggests that any modest increases in output are occurring in a limited number of areas, like semiconductors, leaving the majority of the manufacturing sector stagnant.

In terms of employment, the ongoing reduction in manufacturing jobs has persisted, although there has been a gain of 1.5 million manufacturing jobs since 2010. This recovery pales in comparison to the 6 million manufacturing jobs lost in the 2000s. Currently, manufacturing jobs make up just 8% of the workforce, continuing the sector’s long-term decline and raising doubts about claims of a manufacturing revival.

While there has been an uptick in manufacturing investment, it tends to be restricted to specific industries such as semiconductors. Overall capital investment in manufacturing has stagnated, with fixed asset formation remaining flat for decades. Expenditures on equipment, which represented 8% of GDP in the 1980s, have dropped to around 5%. This slowdown in capital accumulation is closely linked to decreasing productivity in the sector, further challenging the notion of a revival.

Data from Alpine Macro indicates that productivity growth in manufacturing lags behind other sectors of the U.S. economy, making a broad recovery unlikely. The challenges confronting U.S. manufacturing are structural and extend beyond mere investment and productivity. Wealthier societies are naturally shifting their consumption away from goods and toward services, reducing the overall significance of manufacturing.

Even China, often seen as the global manufacturing leader, has experienced a decline in its manufacturing GDP share since 2008. This broader economic transition complicates efforts to re-industrialize the U.S., making such attempts not only difficult but potentially counterproductive.

High-income countries like the U.S. would need to depend heavily on exporting manufactured goods to achieve any significant expansion in this sector. However, this model has not yielded substantial income growth for other industrial leaders like Germany and Japan.

One major barrier to a U.S. manufacturing revival is the high labor costs. American workers are around 70% more productive than their Chinese counterparts, yet they are paid six times more. This discrepancy makes it exceedingly challenging for U.S. companies to compete in labor-intensive industries, regardless of their operational efficiency.

Consequently, the U.S. manufacturing landscape remains largely centered on high-value, specialized industries such as aerospace, advanced machinery, and medical devices, while more labor-intensive sectors have shifted to lower-cost countries like Vietnam and Cambodia.

Analysts from Alpine Macro suggest that much of the talk surrounding a manufacturing renaissance is motivated more by political considerations than by economic realities. The promise of revitalizing domestic manufacturing resonates particularly well in swing states like those in the Rust Belt, where industrial job losses have deeply affected communities. However, initiatives aimed at reversing these trends, such as the Inflation Reduction Act or tariffs on Chinese imports, have not produced meaningful results.

Although the Inflation Reduction Act has generated nearly $400 billion in investment, these initiatives have mainly focused on semiconductors while other vital sectors, like electric vehicles and green energy technologies, have seen minimal benefits. Additionally, a shortage of skilled labor to meet the potential demand in advanced manufacturing exacerbates the situation. The pipeline of new workers remains insufficient, and the manufacturing workforce is aging, with only 9% of employees under 25 compared to 13% in other industries.

Bureaucratic obstacles have also caused significant delays in many large-scale investments proposed under the Inflation Reduction Act, casting further doubt on the policy’s long-term impact.

From an investment perspective, analysts emphasize that industrial stocks lack tangible benefits and continue to underperform, mirroring broader productivity stagnation in manufacturing. Although government subsidies have bolstered the U.S. semiconductor sector, tightening export controls, especially those directed at China, threaten to undermine these gains.

In 2021, China constituted approximately 23% of U.S. semiconductor and circuit-related exports. Over the long term, China’s growing self-sufficiency in low-end semiconductor production could heighten competition and limit growth opportunities for U.S. firms.

While the narrative around onshoring remains politically charged, a more significant trend is emerging: “friend-shoring.” U.S. companies are increasingly relocating production to countries with similar wage levels and economic frameworks as China, but with less geopolitical risk. Countries like Vietnam, Malaysia, Mexico, and India are poised to gain from this trend as firms seek to distance themselves from China amidst escalating tensions.

For investors, this shift presents new opportunities as global supply chains adjust, even as the prospect of a domestic manufacturing resurgence in the U.S. continues to recede.