American manufacturing has been on a steady incline over the past few years following the COVID-19 pandemic. According to statistics from the Federal Reserve, overall industrial capacity utilization rose to 78.4% in March, but this is still notably 1.2 percentage points below its long-run average from 1972–2023. This dip in industrial capacity utilization is also in spite of the current surge in manufacturing construction spurred by the Inflation Reduction Act and the CHIPS Act.
To continue growing the American economy, improving the GDP, and bolstering economic resilience, it’s critical to not only fully restore U.S. industrial capacity, but continue to grow it as well. And, as the federal government has come to realize in their promotion of ‘friendshoring,’ U.S. industrial capacity even affects national security. Policymakers need to work hand in hand with industry leaders (and the market) if they want to achieve these goals in both the short and long term.
What’s holding back domestic manufacturing?
Recent changes in the global marketplace have made the need to expand U.S. industrial capacity more urgent than ever. Production overcapacity by manufacturers in China could drive down cost and demand, undermining key industries and technologies vital to America’s future, and stymying long-term recovery prospects. To safeguard against these challenges, it’s crucial to swiftly increase industrial capacity, bolster domestic production capabilities, and maintain a competitive edge in critical sectors.
The U.S. is also suffering from a loss in manufacturing readiness, caused largely by issues with labor. In addition to the long-term skilled labor shortage, production in the U.S. is often cost-prohibitively expensive due to higher labor costs. Both of these issues combine to prevent domestic manufacturing from playing on an even field with international competitors.
Rebuilding America’s Industrial Capacity
In today’s market landscape, economic resilience is increasingly synonymous with reshoring and other efforts to protect U.S. sovereignty. Rebuilding American industrial capacity is an imperative safeguard that needs priority support, both in terms of investment and legislation.
While outsourcing has its advantages, bringing manufacturing back to the U.S. reduces dependency on suppliers in foreign nations, ensuring a more secure supply chain. And in spite of the current outlook, American manufacturing’s historic success demonstrates our capability in the industrial arena — it just needs reinvigoration. Here’s what it takes:
Lower interest rates
One oft-overlooked metric that shines light on an industry’s outlook is the amount of capital purchases and investments companies are making. In the manufacturing sector, that metric is the purchase rates for industrial machinery. Unfortunately, following the initial, history-making spike in new orders during the pandemic, the demand for new machinery has quickly waned.
The current high interest rates disincentivize manufacturers from taking on loans — even for much-needed expansion. If the Federal Reserve wants to bolster U.S. industrial capacity, they need to significantly lower interest rates to create more favorable borrowing conditions.
Offer broad subsidies
Historically, whenever the government offers subsidies on equipment, we typically see a dramatic increase in purchases. Current government incentive strategies are limiting incentives to clean energy investments and essentially trying to mandate what succeeds in the marketplace. In the short term, broadening incentives could spur much more organic and dynamic economic activity than we’re seeing currently, and free companies weary of the current economic outlook to invest more aggressively in expansion.
Deepen investment in reshoring
Both manufacturers and policymakers need to show leadership in promoting and directly investing in domestic supply chain resilience. Even companies with a global footprint should prioritize sourcing raw materials locally. The more resources utilized domestically, the more robust and capable the U.S. supply chain becomes. Not only will this play a pivotal role in expanding domestic industrial capacity, but shortening supply chains will also eventually benefit manufacturers’ bottom lines.
Accelerate digital transformation
Implementing technology like automation, the Industrial Internet of Things (IIoT), and AI throughout an operation can significantly offset the high costs of domestic labor for American manufacturers, streamlining processes, improving efficiency, and reducing waste. This is key if manufacturers want to compete effectively with foreign firms while maintaining profitability. Policymakers can further spur adoption with subsidies and incentives, while keeping in mind the needs of the American workforce.
Committing to a New Era of Domestic Manufacturing
Domestic manufacturing isn’t just a critical part of the economy — it’s the backbone of our nation’s self-reliance and stability. If we take the steps to foster a robust manufacturing sector at home, we can simultaneously mitigate our supply chain vulnerabilities and realize the national security goals behind reshoring (and more recent ‘friendshoring’) policies.
Given the number of technological advancements we’ve seen since the height of the U.S. manufacturing sector, expanding domestic industrial capacity now could qualify as a mini industrial revolution. Manufacturers need to embrace the potential of this moment and be a part of the surge in demand. Beyond revitalizing the U.S. economy, actively driving the expansion of industrial capacity will position them to be leaders in the new landscape.
