Fed’s Rate Cut Provides Limited Relief for US Factories Facing Competition from China

By Timothy Aeppel

Drew Greenblatt is enthusiastic about the Federal Reserve’s recent decision to cut interest rates. However, the half-point reduction—marking the beginning of a series of anticipated cuts—won’t ease the competitive struggles he faces with one of his major customers.

During the COVID-19 pandemic, this buyer shifted operations out of China, resulting in approximately $800,000 in orders for Greenblatt’s small U.S. factory last year. In response, Greenblatt invested in robotics and hired additional staff to accommodate this new demand. Yet, earlier this year, the orders ceased.

"When I inquired about the sudden halt, they informed me they returned to China to reduce costs," explained Greenblatt, who heads Marlin Steel, a manufacturer in Baltimore specializing in highly engineered wire baskets used in industrial and laboratory settings.

Greenblatt’s situation highlights some of the persistent challenges U.S. manufacturers face—issues that lower interest rates will not rectify. These challenges include ongoing supply chain disruptions, high prices for raw materials, and growing labor unrest in certain sectors, particularly involving competition with China.

In response, U.S. Vice President Kamala Harris is set to unveil new economic initiatives aimed at enhancing wealth-building opportunities for Americans and providing incentives for businesses. This rollout occurs as prospective voters seek clarity on how Harris could bolster their economic prospects if elected president.

A central issue in the upcoming election is how both Harris and former President Donald Trump intend to tackle the competitive threat posed by China. The current administration has proposed banning key Chinese software and hardware in connected vehicles within the U.S. due to security concerns.

Greenblatt hopes for more robust trade measures, not just targeting China. “If more tariffs were imposed, we’d likely see increased shipments to our clients,” he remarked. “Instead, our clients opt for suppliers in countries where currencies are subsidized.”

A Complex Landscape

High interest rates contribute to borrowing costs and are often cited as prime factors in the overall slowdown of U.S. manufacturing since early last year. After witnessing an increase of nearly 750,000 jobs in 2021 and 2022, manufacturers have since reduced their workforce by approximately 7,000 jobs in 2023, according to the Labor Department.

While production did see a rebound in August, driven by a surge in motor vehicle manufacturing, the revised data for July indicates that factories remain stagnant. Additionally, a recent report from the Philadelphia Fed highlighted growing supply chain challenges and rising input costs affecting manufacturers within that region.

“What the Fed can effectively do is create expectations for short-term growth through a rate cut, which can be impactful,” noted Cliff Waldman, CEO of an economic consulting firm focused on the industrial sector. Lower rates may encourage businesses to pursue new capital investments, but “this represents just a fraction of the complicated reality facing U.S. manufacturing,” Waldman added.

He emphasized that many producers are still contesting who will absorb the elevated costs stemming from inflation. Compounding this issue are the ongoing disruptions in global supply chains that originated during the pandemic.

Unexpected Pressures

For Kevin Kelly, another manufacturer, the latest challenge comes in the form of an unexpected spike in electricity costs. As the head of a family-run business that produces plastic bags for produce companies near San Francisco, he relies heavily on electricity to power large printing presses.

Kelly reported that his electricity expenses soared to $350,000 in June, up from $290,000 the previous month, due to unexpectedly high summer rates. "We didn’t anticipate this surge," he admitted. "We were aware rates were increasing, but not to this extent."

California’s utility rates are the second highest in the U.S., driven in part by the costs needed to fortify the power grid against wildfires. To cope with these rising expenses, Kelly is hastening the installation of solar panels, although the upfront costs are substantial. He has also modified the factory’s work schedule, shutting down major machines for two hours during peak rate periods to manage costs.

"We’ve assigned people to clean the presses and handle other tasks during those two hours to keep them busy, but it has still reduced our overall output,” Kelly explained.

A potential new challenge looms with a significant strike at East Coast and Gulf of Mexico ports scheduled to begin soon. Any vessels currently at sea could face delays, prompting manufacturers to scramble for alternative shipping methods, further inflating costs.