Manufacturing, Reshoring and Big Challenges
Summary: As of 2024,manufacturing contributed $2.65 trillion to the US economy, provided close to13 million jobs and accounted for 10.3% of the country’s GDP. One of the cornerstones of the Trump administration is the revival of the manufacturing sector. This is to be accomplished through a combination of economic policy measures, promotion of returning manufacturing to the US or reshoring, and, when perceived necessary, bullying companies, often with the threat of tariffs as well as a steady stream of presidential badgering on social media. While there is a good national security rationale behind bringing home certain manufacturing activities and protecting them from unfair foreign competition, tariffs are not a magic wand for reshoring and revival. The process will take longer than marketed and is much more complicated than campaign rhetoric.
In May 2025, economic activity in manufacturing contracted for the third straight month. According to the Manufacturing ISM Report on Business, May's number was 48.5%, following April's 48.7%. The following sectors contracted: new orders and backlogs, production and employment, raw material inventories, and imports and exports. Among the worst hit sectors were paper and wood products, food and beverages, chemical products, and primary metals. Several sectors reported expansion, including petroleum and coal products and machinery. Altogether 57% of the US manufacturing sector contracted in May, up from 41% in April.
Why the gloomy outlook? The survey's respondents generally agreed on the negative impact of tariffs.
- The auto sector, "There is a continued softening of demand in the commercial vehicle market, primarily related to higher prices and economic uncertainty. The impact of ever-changing trade policies of the current administration has wreaked havoc on suppliers' ability to react and remain profitable."
- Food and beverage sector: "Tariffs, avian influenza, and broader commodity markets continue to impact business conditions. The volatility of all three makes business planning and overall conditions challenging."
- Chemical products: "Most suppliers are passing through tariffs at full value to us. The position being communicated is that the supplier considers it a tax, and taxes always get passed through to the customer. Very few are absorbing any portion of the tariffs."
- Computer & electronics goods: "Government spending cuts or delays, as well as tariffs, are raising hell with businesses. No one is willing to take on inventory risk."
Beyond the ISM Manufacturing Report - Big Challenges
Tariffs are inflicting pain on the manufacturing sector as reflected in the ISM report. Indeed, the inconsistent nature of tariff policy has injected a high level of uncertainty into everything from auto production to companies that use rare earths (mostly imported from China).As one paper company in the ISM survey noted: “Uncertainty due to the recent tariffs continue to weigh on profitability and service. An unresolved trade deal with China will result in empty shelves at retail for many do-it-yourself and professional goods.” Not exactly encouraging.
But manufacturing was struggling long before President Trump entered office. Prior to a brief January-February uptick in economic activity in manufacturing, the sector saw 26 consecutive months of contraction, well before Trump’s “Liberation Day” nuking of global trade. Other factors include weaknesses in US labor, underscored by shortages in key job areas, ranging from electricians, welders and machine operators to engineers and supervisors. As Manufacturing Today recently noted: “US manufacturing is facing a “perfect storm of demographic, economic, and societal challenges”, the most pressing of which are the retirement of baby boomers, a shift in career preference among younger generations (very much evident among millennials and Gen Z workers) and regional disparities. As Manufacturing Today noted of the last point: “Manufacturing hubs in the Midwest and Southern US are among the hardest hit by labor shortages, with rural areas facing an uphill battle in attracting skilled workers. These regions often lack the infrastructure, education systems, and resources needed to develop a robust local talent pipeline, making it difficult to keep up with labor demand.”
Another issue is that there is no magic wand to build a factory in a hurry. It is one thing to say that reshoring is in motion(which it is) but is another thing entirely for getting a facility up and running. According to Autovista, 18 months are needed to build a gigafactory (which is a battery manufacturing plant) from scratch, followed by15 months to reach full production capacity. Many new projects have been announced, but there is a time lag before the factory is operational
Another complication facing reshoring and new construction of US manufacturing is looming deficiencies in the power generation grid. AI technology, which is revolutionizing manufacturing, has a voracious appetite for energy. The current US power grid is not up to the task. According to the International Energy Agency IEA), a typical AI-focused datacenter consumes as much electricity as 100,000 households; the largest ones now under construction will consume 20 times as much. While efforts are being made to upgrade electric power generation, considerable work is needed, all of which adds to a longer timeframe for manufacturing reshoring. And there is plenty of work to be done to upgrade the US power grid. The American Society of Civil Engineers in its 2025 Report Card for America’s Infrastructure rated US energy infrastructure at a troubling D+.
There are other headwinds facing US manufacturing. These include a gap between the US and other countries in robotics (the US is behind China, Japan and South Korea); deportation is shrinking the labor pool as with construction; and tariffs are making imported inputs more expensive. All that said, the national security issue cannot be easily dismissed. If nothing else came from the COVID-19 pandemic, the US has become heavily dependent on other countries like China and Vietnam for many essential products. The US needs to maintain some core manufacturing, such as primary metals production (iron and steel mills, aluminum production, and nonferrous metal processing), shipbuilding, basic chemicals, and emerging and foundational technologies, such as advanced semiconductors, AI, and battery storage.
Despite the Trump administration’s assertion that US manufacturing will soon be in a new golden age, there will be considerable pain from the related tariff process, probably higher unemployment(at least through 2025), more inflationary pressures, and consumer angst. In many regards, the Trump administration’s effort to reshore and revitalize US manufacturing is racing the electoral clock set to chime in November 2026, the mid-term elections. Between here and now we see manufacturing on a gradual downward trajectory, a situation that will not be reversed until there is more certainty in US trade and regulatory policies. Considering President Trump’s preference for unpredictable and inconsistent policy behavior, this could take some time before more tangible results become manifest in the ISM Manufacturing Business Index. To leave this on a more hopeful note John Quincy Adams, the sixth president of the US, noted: “Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” Let’s hope this is the case with the experiment in reshoring US manufacturing.
Scott B. MacDonald, Ph.D.
Chief Economist,
Smith’s Research & Gradings
