The Tariff-Fueled U.S. Manufacturing Revival Is Here
So much for the idea that tariffs would damage U.S. productivity and manufacturing.
Ever since Donald Trump returned to the White House and especially since Trump’s Liberation Day tariff announcement, the economic press has reported that American manufacturing is struggling under President Trump’s tariffs. Even worse: stories have frequently claimed that manufacturing is struggling because of the tariffs. The Wall Street Journal declared manufacturing “in retreat.” The Associated Press said tariffs were “hurting American manufacturers instead of helping them.” Reuters reported that import duties had undercut manufacturing.
There’s just one problem: none of that is happening. If tariffs are hurting American manufacturing, someone forgot to tell the factories.
The Labor Department reported Thursday that manufacturing output rose at a 4.6 percent annual rate in the second quarter. Hours worked increased 2.6 percent. Productivity, which measures output per hour, rose 1.9 percent.
This is an odd sort of industrial decline: factories are producing more, using more labor, and becoming more efficient at the same time.
That’s pretty much the opposite of what the anti-tariff crowd has claimed for years. They insisted, without evidence, that tariffs would drive up input costs and have anti-competitive effects that would encourage inefficiency. Faced with higher input costs, manufacturers would retreat from production. Even if tariffs increased domestic output, it would come at the cost of lower productivity.
Ah well. Maybe it made sense on a whiteboard or in a seminar room. Reality has decided to give the anti-tariff claim a failing grade.
Manufacturing Declined Under Biden, Revived Under Trump
The reversal from the end of the Biden administration is dramatic. Manufacturing output fell at a 2.3 percent annual rate in the third quarter of 2024 and 2.1 percent in the fourth. Hours worked declined in both quarters. Productivity fell in the third quarter and was flat in the fourth.
That’s not really supposed to happen. If your hours worked decline, productivity should increase unless output declines faster. But output was falling so fast that it offset the falling hours, so productivity declined. It does happen—statistically, about 13 percent of the time—but it is always bad news.
Since then, manufacturing output and productivity have risen in five of six quarters. The fourth quarter of last year was the lone setback—likely related to fallout from the government shutdown—and its losses were quickly recovered.
The turnaround is especially powerful in durable goods, the portion of manufacturing most heavily affected by tariffs. Durable-goods output rose at a 7.3 percent annual rate in the second quarter. Hours increased 4.5 percent, productivity rose 2.7 percent, and unit labor costs fell 1.6 percent.
Over the six quarters since the end of 2024, real durable manufacturing output has risen 6.2 percent. Productivity has increased 5.2 percent. Labor hours are up around one percent.
That’s the stuff economic dreams are made of. Productivity often rises during a downturn because hours fall faster than output. Output can increase while productivity falls. Hours can increase without any improvement in efficiency. Getting all three to rise together is the Goldilocks combination—and the first two quarters of this year mark the first back-to-back occurrence since 2018.
We’re Making More Stuff Again
The longer-term figures make the change even more striking. Real durable manufacturing output stood at almost the same level in the final months of Biden’s presidency as it did when he took office four years earlier. Durable manufacturing productivity had gone essentially nowhere since 2010 and then deteriorated during the final Biden years.
Now durable output is at its highest level since early 2019. Productivity has climbed above its levels in 2010, 2015, and 2020 and is the highest since 2018.
The conventional theory held that tariffs would raise input costs, shelter inefficient producers, and damage productivity. The theory left out what prolonged import competition had done to the domestic manufacturing system. As we explained back in June, recent research published by the National Bureau of Economic Research found that lost output led to plant closures, lower capacity utilization, weaker profits, reduced investment, and less research and development. The import invasion hollowed out the system that produced productivity growth.
Tariffs appear to be reversing that process. Greater demand for domestic production raises capacity utilization and gives manufacturers stronger incentives to invest, expand, and improve their production processes.
In an economy with slow workforce growth, rising output per worker is one of the most important markers of successful economic policy and a key to economic growth. And while factory construction spending has declined, this largely reflects the fading of the factory-building surge pulled forward by Biden’s CHIPS Act and Inflation Reduction Act subsidies. A completed factory stops generating construction spending and starts generating manufactured goods. What’s more, much of the new nonresidential construction driving our economy—largely related to the AI buildout—is officially classified as “office” rather than “manufacturing.”
The hard data now show that American manufacturing has broken out of years of stagnation. Output is growing. Productivity is rising. Labor hours have turned upward. The tariff-induced industrial disaster exists mainly in the stories written about it.
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