Tariff Doom Didn’t Show Up in the Factory Data
Cato Institute economist Scott Lincicome’s recent Bloomberg column argues that U.S. manufacturing “ended 2025 with a thud,” citing employment losses and weak survey data as evidence of policy failure. But this analysis makes a fundamental error: treating employment as the scoreboard in a labor-constrained economy.
A better scoreboard would look to output and productivity. In the third quarter of 2025, manufacturing productivity rose 3.3 percent because output climbed 2.6 percent even as hours worked fell 0.7 percent. Over the past four quarters, productivity is up 2.3 percent—the biggest gain since 2021. Manufacturing is mounting a comeback.
This productivity surge contradicts what anti-tariff economists like Linciome predicted tariffs would do. In 2024, Lincicome’s Cato colleague Erika York pointed to an IMF study that claimed tariffs lower productivity. The Yale Budget Lab warned that tariffs would “affect the economy through lower productivity.” J.P. Morgan Asset Management’s analysis stated flatly that tariffs “diminish productivity” because they push resources away from comparative advantage.
Yet 2025 delivered the opposite result. Manufacturing productivity recovered 3.2 percent from its late 2022 trough, with the year-over-year gain of 2.3 percent representing the strongest four-quarter performance since 2021. This recovery is particularly significant given the “mysterious slowdown” documented by the New York Fed in July 2024 which showed manufacturing productivity declining from 2015 through 2022. Bureau of Labor Statistics data shows this represented a fall from peak to trough of roughly 4.5 percent. The current recovery represents a fundamental reversal of that troubling trend.
Understanding manufacturing’s current trajectory requires recognizing when the sector actually hit bottom. Manufacturing output troughed in the fourth quarter of 2024, marking the low point after years of decline from the 2018 peak. From that fourth quarter 2024 trough through the third quarter of 2025, output rose 2.33 percent, representing an annualized growth rate of 3.12 percent. All three quarters of 2025 showed consistent acceleration.
The Blue Collar Wage Boom
The productivity gains are translating directly into worker benefits. Average hourly earnings in manufacturing rose from $28.33 in December 2025 to $29.51 in December 2025, a 4.17 percent increase for the year. Throughout 2025, wage growth consistently exceeded 4 percent year-over-year.
This combination—rising productivity, recovering output, and strong wage growth—represents sustainable, healthy expansion rather than the zero-sum tradeoffs that characterized the earlier decline period. When productivity was falling from 2015-2022 while wages rose, the sector faced margin compression. Now productivity is rising faster than wages, which are rising faster than inflation, creating a genuine win for both workers and businesses.
Perhaps the most telling indicator of manufacturing’s health is capital investment. New orders for nondefense capital goods excluding aircraft—a key measure of business investment in manufacturing capacity—have surged in 2025. Orders rose from $75.97 billion in January to $78.0 billion in October, reaching just 0.15 percent below the all-time high set in August 2022. Every single month in 2025 has exceeded the 2024 average, with six consecutive months of increases from May through October. Year-over-year growth hit 6.21 percent in October, the strongest since early 2023.
Capital investment is inherently forward-looking. When businesses commit billions to new equipment and machinery, they’re betting on future profitability and growth. The surge to near-record levels directly contradicts any narrative of manufacturing malaise.
The employment data that Lincicome emphasizes requires context from recent Federal Reserve research. A San Francisco Fed note published in January 2026 documents that labor supply and demand have declined in tandem—job growth fell from roughly 250,000 monthly in early 2023 to 100,000 in the first half of 2025, while labor force growth dropped from 270,000 to 50,000 monthly. This “balanced slowdown” explains why unemployment has barely budged despite slower job growth.
In this labor-constrained environment, employment levels become less meaningful than output per worker, wages per worker, and total output—all of which are improving. A sector producing more with fewer workers while paying better wages isn’t failing; it’s becoming more efficient and competitive.
Tariffs and the Rebirth of American Manufacturing
The timing of these improvements matters for policy analysis. Manufacturing output troughed at the end of the Biden administration, before the 2025 tariff implementations that Lincicome criticizes. The recovery—in productivity, output, wages, and capital investment—has occurred during 2025, with all four metrics showing consistent improvement through three consecutive quarters. Tariffs—along with abundant energy policies, deregulation, and tax cuts—are leading to a rebirth for American manufacturing.
None of this denies that tariffs create adjustment costs or that some manufacturers face challenges. Rebalancing the U.S. economy and the global trading order was never going to be easy. After decades of policies that encouraged offshoring of manufacturing, rebuilding a Made in America economy will be uncomfortable for those who are slow to adjust. The ISM surveys Lincicome cites reflect real concerns about input costs and uncertainty. But survey sentiment and hard economic data sometimes diverge, particularly during periods of structural change. And the productivity data suggests that whatever adjustment costs tariffs imposed, they haven’t prevented—indeed, they likely catalyzed—a fundamental improvement in manufacturing efficiency.
The complete picture shows a manufacturing sector that inherited a trough in late 2024 and has spent 2025 recovering across multiple dimensions. Productivity is growing at its fastest pace in four years. Output is climbing steadily from its low point. Wages are rising at healthy rates above inflation. And businesses are investing in new capacity at near-record levels—the clearest possible signal they believe in manufacturing’s future.
This doesn’t look like a sector ending the year “with a thud.” It looks like a vital economic sector undergoing a renaissance.
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