US manufacturers are stuck in a rut despite subsidies from Biden and protection from Trump

U.S. manufacturing remains stagnant, shedding jobs and experiencing declining activity for months despite significant government interventions including Biden-era subsidies and Trump's protectionist tariffs. High interest rates, coupled with the disruptive effects of tariffs that increase input costs and create policy uncertainty, are hindering growth. This environment is leading manufacturers to delay investment and hiring decisions, with economists predicting continued flatlining production and potential recession for the sector.

Analysis

The U.S. manufacturing sector is experiencing a protracted period of stagnation, characterized by declining activity and employment despite significant government interventions from both the Biden and Trump administrations. Data from the Institute for Supply Management (ISM) indicates that factory activity has contracted for the fourth consecutive month as of June, and has been in a state of decline for 30 of the 32 months since October 2022. This weakness is mirrored in the labor market, with factories shedding 7,000 jobs in both May and June, putting manufacturing employment on a path to decline for the third year in a row and effectively erasing all post-pandemic job gains. The sector's malaise is driven by a confluence of factors, including elevated borrowing costs resulting from the Federal Reserve's 11 rate hikes and, more critically, the dual impact of current trade policy. While tariffs are intended to protect domestic industries, they have also inflated input costs, with U.S.-made steel prices now more than double the world export price ($960 vs. $440 per metric ton). This policy has created significant uncertainty, as confirmed by ISM survey respondents, causing manufacturers to delay critical investment and procurement decisions. Consequently, economists like Mark Zandi of Moody's Analytics forecast that manufacturing production will continue to flatline, potentially leading to a recession within the sector.

Key Decisions for Investors

• Investors should exercise caution and consider underweighting exposure to the U.S. manufacturing sector, particularly firms highly sensitive to domestic production cycles and those with significant reliance on imported raw materials like steel and aluminum.
• Closely monitor companies' supply chain structures and input costs, as firms unable to absorb or pass on tariff-related price increases will face significant margin compression.
• The primary catalyst for the sector is clarity on trade policy; therefore, investment and hiring decisions will likely remain on hold until the Trump administration's tariff plans are finalized and stable, making any definitive policy announcement a key signal to watch.
• While tariff uncertainty is the dominant headwind, any signs of easing by the Federal Reserve could provide marginal relief on borrowing costs, but this is a secondary factor to the overarching trade policy risks.