Tariff Issues Missed in Factory Data
A recent article from Bloomberg by economist Scott Linthicum at the Cato Institute claims that the U.S. manufacturing sector “ended 2025 with a bang,” pointing to significant job losses and weak survey data as signs of policy failure. Yet, this perspective seems rather misguided. It seems to treat employment merely as a scoreboard in a labor-constrained economy, which doesn’t tell the whole story.
Perhaps a better metric would focus on production volume and productivity. For instance, in the third quarter of 2025, manufacturing productivity rose by 3.3 percent, even as output grew by 2.6 percent while working hours dipped by 0.7 percent. Over the past four quarters, productivity increased by 2.3%, marking the largest jump since 2021. Quite simply, the manufacturing sector is on a recovery path.
This surge in productivity contradicts the expectations set by anti-tariff economists like Linthicum. In 2024, Erica York, a colleague at Cato, referenced an IMF study suggesting that tariffs can lower productivity. The Yale Budget Institute warned that tariffs might “impact the economy through reduced productivity.” Furthermore, a JPMorgan Asset Management analysis bluntly states that tariffs “reduce productivity” by reallocating resources away from comparative advantages.
However, 2025 demonstrated the opposite trend. Manufacturing productivity rebounded by 3.2% from its lows in late 2022. The year-over-year increase of 2.3% signifies the strongest four-quarter performance since 2021. This recovery is particularly notable in light of the “mysterious economic slowdown” highlighted by the New York Fed in July 2024, which showed a decline in manufacturing productivity from 2015 to 2022—a drop of approximately 4.5% from peak to trough. Now, the current recovery indicates a significant reversal of that troubling trend.
To really grasp the manufacturing sector’s future, we need to understand when it will hit its lowest point. Manufacturing output reached its nadir in the fourth quarter of 2024 after several years of decline since peaking in 2018. From this trough in Q4 2024 to Q3 2025, output rose by 2.33%, translating to an annualized growth rate of 3.12%. Each quarter in 2025 displayed consistent acceleration.
Blue-Collar Wage Growth
In tandem with increased productivity, employee benefits have seen a boost. The average hourly wage in manufacturing climbed from $28.33 in December 2024 to $29.51 in December 2025—a yearly increase of 4.17%. Throughout 2025, wage growth consistently outpaced 4% on a year-over-year basis.
This mix of rising productivity, a recovery in production, and robust wage growth reflects a sustainable economic expansion rather than the zero-sum trade-offs observed during previous declining periods. The sector faced margin compression from 2015 to 2022, where wages increased while productivity declined. Now, with productivity outpacing wage growth and wages exceeding inflation, both workers and businesses are benefiting.
Perhaps one of the clearest indicators of the manufacturing sector’s health is capital investment. New orders for non-defense capital goods, excluding aircraft—an essential measure of business investment in manufacturing capacity—spiked in 2025. Orders swelled from $75.97 billion in January to $78 billion in October, nearing the all-time high reached in August 2022. Each month of 2025 surpassed the average from 2024, showing a six-month streak of increases from May to October. By October, the year-over-year growth rate hit 6.21%, the highest since early 2023.
Capital investments are inherently forward-looking. When companies invest billions in new machinery and equipment, they are banking on future profitability and growth. The surge to near-record levels directly contradicts any narrative suggesting a downturn in manufacturing.
The employment data Linthicum highlights needs context from a recent Federal Reserve study. A note from the San Francisco Fed revealed that labor supply and demand have dropped in tandem, with employment growth tapering from about 250,000 jobs a month in early 2023 to 100,000 in the first half of 2025. Labor force growth also fell from 270,000 to 50,000 per month. This “balanced economic slowdown” clarifies why the unemployment rate has remained relatively stable even as job growth decelerated.
In an environment with a constrained labor force, employment levels are becoming less significant than output per worker. Improvements in wages and total output indicate strengths in sectors that produce more with fewer workers while providing better pay. We seem to be becoming more efficient and competitive.
Tariffs and the Revival of U.S. Manufacturing
The timing of these advancements is crucial for policy analysis. Manufacturing output hit its lowest point at the end of the Biden administration. Recovery in productivity, output, wages, and capital investment occurred during 2025, with all metrics showing steady improvement over three consecutive quarters. Tariffs, combined with favorable energy policies, deregulation, and tax cuts, have contributed to a revival in U.S. manufacturing.
This is not to downplay that tariffs can impose adjustment costs or that some manufacturers may struggle. Restoring equilibrium to the U.S. economy and the global trade landscape is always challenging. After decades of policies fostering offshore manufacturing, rebuilding a Made in America economy can be discomforting for those slow to adapt. Linthicum’s reference to the ISM study captures legitimate concerns about input costs and market unpredictability. Yet, there often exists a disconnect between survey sentiment and tangible economic data, especially during significant structural shifts. Productivity data implies that, if there were adjustment costs due to tariffs, they likely spurred vital improvements in manufacturing efficiency.
The broader perspective shows the manufacturing industry emerging from an economic low in the second half of 2024, with recovery evident in multiple areas through 2025. Productivity is increasing at the fastest rate in four years. Output has seen consistent growth since hitting its lowest point. Wages are on a healthy upward trajectory that surpasses inflation. Companies are also investing in new production capabilities at near-record levels. This strongly indicates that businesses have confidence in the manufacturing sector’s future.
Overall, this doesn’t suggest a sector that’s going to end the year on a negative note. It appears that key economic sectors are experiencing a renaissance.
