Dear Valued Clients and Friends,
The subject of tariffs has dominated markets this year, dominated media attention, and yes, been pretty dominant here in the Dividend Cafe. I may have said on March 28 that I was done talking about tariffs, but by April 4 it was clear I couldn’t be, and I think assessing President Trump’s real psychology (vs. policy) on the matter was important, and in fairness, I really haven’t made tariffs the primary Dividend Cafe focus since the last week of April. But tariffs have dominated national conversation for some time and for pretty legitimate reasons, and I have done my best to give the whole subject fair treatment here in the Dividend Cafe.
Readers of the Dividend Cafe know that I do not support tariffs, and have tried to mostly address the issue here in the Dividend Cafe along the lines of market impact. I have made a more ideological case against tariffs elsewhere, but our focus here is on macroeconomic and investment market ramifications. Regardless of what one believes about the efficacy of tariffs or the tactic of threatening tariffs to try and supposedly extract better terms for American trade, the pro-tariff argument has mostly (but not always) been connected to some sort of premise that U.S. manufacturing is collapsing, and tariffs are needed to resurrect domestic manufacturing from the dead. I say “not always” because sometimes the arguments are instead connected to the need for more tax revenue, and other times to national security concerns, but at the core of most tariff sentiment is a belief that American manufacturing needs some help.
Many oppose the conclusion that tariffs are the right way to help U.S. manufacturing, even if that premise were correct (I am one of those people). But today in the Dividend Cafe, we are not going to concern ourselves with whether or not tariffs scratch a certain itch, but rather whether or not there is even an itch to be scratched. The concern many genuinely have for American workers and American manufacturing is commendable, yet we also want to ensure that our commendable concerns meet reality, especially where trade-offs are concerned. Today, the Dividend Cafe seeks to unpack deeper truths about the state of U.S. manufacturing, with an eye towards what it means for the American economy, for investors, and yes, for matters of public policy.
So grab your hard hat and your lunch pail, and let’s jump into the Dividend Cafe …
(before we do – take note of the summary piece our Director of Planning, Matthew Gregory, has penned, on tax and planning implications to note around the One Big Beautiful Bill Act here).
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Why does this matter?
Why am I dedicating a whole issue of the Dividend Cafe to Manufacturing? Why not a whole issue on Technology, or Financial Services, or Legal Services, or Agriculture? Why is manufacturing, in particular, worthy of our dedicated attention? Well, first of all, the aforementioned sectors and categories are certainly worthy of our attention to, and I am sure there are is more to be said specific to those domains, too. But the subject of manufacturing is of particular relevance to us for a few reasons:
(1) If there is a particular problem hurting the plight of American manufacturing, and many people’s ability to support their families and have a fulfilling life is dependent on opportunity in manufacturing, then we ought to care to wonder what that problem may or may not be, because we care about human people. Now, identifying the problem(s) and the solutions(s) may not be agreeable, but that there is a human component here is undeniable, and therefore at least worthy of a serious person’s sober analysis.
(2) Manufacturing is the pretext for much of the suggested tariff policy of our day. We can acknowledge the relevance of tariffs to the economy and to investors, and once we do that, it is worthy of our probing as to whether or not there is an issue here at all, and if there is, it is worth considering whether or not that policy response is the optimal one.
(3) There is a particular political context that has honed in on manufacturing as the symbol or catch-all for “working class” voters. Our politics has always been largely coalitional, and outside of race and religion, there is a socio-economic compartmentalization that is used to build voting blocs. Are all “non-college degree” voters the same as “working class” or “blue collar,” and are all of these the same as those in the “manufacturing sector”? Probably not – daylight exists in reality across the way these three or four terms are used – but in terms of the general political context, “manufacturing” has become a bellwether for a significant focus and attention in the policy sphere that has relevance to broad messaging and coalitional alignments. To the extent the reality in manufacturing becomes (or stays) a hot-button issue in the political sphere, it becomes pertinent for investors who will be impacted (positively or negatively) by those shifting winds.
The Heart of the Matter
I think I can summarize the underlying tension in our societal feelings about today’s topic right off the bat: The current national conversation about manufacturing confuses a reduction in manufacturing jobs with a slowdown in U.S. manufacturing. Period. Once we have properly understood this distinction, unpacked the reality of both, cared to look into the causation of both, and fully analyzed what it all means, we will have a much more effective understanding of the larger issue. But identifying this off the top will go a long way in getting to the heart of the matter: Many who say “the U.S. doesn’t make anything anymore” mean to say “the U.S. uses fewer workers to make the things it makes,” and those two things are not the same.
It may be that the distinction does not matter to some. One may feel that the objective of our industrial policy should be to employ the maximum number of people, rather than to manufacture the most things, and that position is worth engaging with. However, what confuses the discussion is a failure to properly define terms and accurately establish the premises. So let’s look at a few things pertinent to our understanding of U.S. manufacturing.
Our Production in Pictures
At a quick glance, one can see that we are not exactly declining in Industrial Production … In fact, it is 5x higher than it was throughout the 1950s:
Our manufacturing output is 50% higher now than it was thirty years ago:
The U.S. is the second-largest manufacturer in the world. Domestic manufacturing contributes $2.9 trillion to our GDP, accounting for approximately 10% of our total economy. And while hating on globalization is all the rage these days, our manufacturers exported over $1.6 trillion of goods last year.
One of these things is not like the other
The employment picture is not identical to the country’s industrial and manufacturing output. If advocates of tariffs, subsidies, and industrial policy limited their arguments to claims that America was a manufacturing failure, there would be no political momentum for the cause. Our output and value creation are actually envied by more or less the entire world, and that is in addition to our dominance in the service sector of the global economy. So why the urgency, panic, and policy demands when it comes to manufacturing? What is the concern, exactly? Jobs. Very few claim that we don’t make stuff (even if they claim to wish we made more); the emotion of the argument is rooted in employment.
We do employ 13 million people in manufacturing who earn an average salary of $103,000. And there is a massive contribution here from small business – 74% of our 239,000 manufacturing employers have less than twenty employees! However, industrial workers made up more than 20% of the workforce decades ago, and such jobs now account for roughly 8% of our workforce (i.e., approximately 13 million jobs in a labor force of around 160 million people). Is 20% of our workforce in factory jobs realistic? Desirable? Possible? Better? Can government policy make that happen if we wanted it to? Do we want it to? In short, could we really add 20 million new factory jobs to the 13 million we have now to achieve the allocation of decades ago?
The employment picture in manufacturing and our capability and output in manufacturing are two different things. We make more with fewer people. Can we get more people involved in the space by making more, still? Or can we reorient the economy to tilt the scales this way? Would that make our economy more productive? Would it make our economy more “balanced”? These are the questions that drive this substantive debate, and there are some good-faith arguments from all corners. There are also rank platitudes and arguments of very bad faith. We’ll concern ourselves with the serious stuff only.
You do you, boo
One of the cornerstones of a market economy, a basic tenet of classical economics, is the wealth creation that comes from the division of labor. Specialization of human endeavor is a feature in a free society that not only produces individual benefits (people are free to pursue their hopes and dreams) but also collective benefits (the society becomes richer and better as more people pursue more things, resulting in more innovation and better products and services). Virtually all classical economists have understood specialization and division of labor to be a huge net positive to the standard of living in society, though regretfully only some have understood why (these things flow from the individuality of the human person as created by God, unique, different, made in His image, whose identity is not rooted to being part of a collective). The economic repercussions of unleashing individuality in the marketplace over the last 250+ years have meant hockey-stick growth for the world.
Why do I bring up choice and individuality? Simply put, there is significant evidence that policy considerations have not ticked up employment in services (26 million people), or technology (10 million), or finance (7 million), or health care (22 million) – as much as individual choice and freedom. Does the regulatory apparatus put a finger on the scale? You bet. Is there some inefficiency within some of these sectors (too many administrators in education and not enough teachers)? Don’t get me started! But should we consider it a negative that 13 million people are employed in factories and 26 million people in services?
To answer that question while prizing individuality, desiring maximum economic productivity, and seeking optimal conditions for human flourishing, we have to understand why it is happening.
The economic opportunity in the services sector has increasingly outpaced the opportunity in the goods sector for some time. Service jobs have been a larger part of our labor force since before the Civil War – this is not new.
What we have to unpack economically is where distortions and problems are creating a certain labor force allocation (I am sure there is some of that, and equally sure it is not significant), versus where the labor allocation we have is actually a by-product of human choice, preference, and organic economic realities (supply, demand, subjective factors, etc.).
Nothing new under the sun
Long before the increase of service jobs took on a greater share of the labor force than manufacturing, both services and goods had the same effect on agriculture jobs.
And what drove this basic evolution? Technology, efficiency, and human choice. Are there some who believe in using governmental policy to try to drive more jobs to agriculture? I suppose so, but not really – it certainly isn’t a potent political group. But why has the more recent impact in manufacturing had such a different response? Do we as a society despair of the idea of producing more things with fewer people, or do we love the fact that modern supply chain efficiencies, just like post-industrial revolution efficiencies, have made a way for a higher quality of life (more products, less costly to make and transport, etc.)?
Begging the question
Some will say, and some will even say it in good faith, that it is untrue that millions of people have self-selected into service jobs vs. factory ones – or at least not provable – because those jobs actually went away because of offshoring and various other global considerations. The trends and charts do not back that up, as the general direction was overwhelmingly headed that way well before China joined the WTO, and well before NAFTA, and well before other globalization events that pre-dated even those. But is it reasonable to think that various global developments exacerbated the trend? Certainly. But why am I so confident that if we tariffed, subsidized, and centrally planned our way to try and force more domestic manufacturing into the national orbit, it would not alter the labor data?
Research, my friends.
80% of people in the CATO 2024 Globalization Survey said they would like to see more manufacturing jobs (sounds right). And then just 25% said they wanted one (of the same respondents). Much like the statistics that show most Americans hate Congress but keep voting for their own Congressman (or Congresswoman), there is a massive delta between the idea of factory work and the pursuit of it.
But that is not the real end of the research. The actual actions of people voting with their feet (and their computer mouse) tell us a lot. We have an increase in open, unfilled U.S. manufacturing jobs that is nearly double the average of the last 25 years. In a low-unemployment moment, we sit with about 500,000 open manufacturing jobs, and the open manufacturing jobs have gone from about 1-2% of total manufacturing positions to about 5% – a meaningful move higher.
The National Association of Manufacturers exists to advocate for the manufacturing industry, and what do they say about the reality of labor supply and demand in their own space? That “67% of manufacturers cite the inability to attract and retain employees as their primary challenge.”
But why?
I don’t believe the data is very ambiguous about where many people in the labor force are opting to go, and I don’t think the data is very ambiguous that there are manufacturing and factory jobs available for those who want them. But if the numbers seem lower than we want, or the percentage it represents in the economy seems sub-optimal (for whatever reason), why? What is driving this result where increased productivity is coming without significant increased labor (at least increased labor on an assembly line)?
I think you all know what I am about to say, because we all know it is true. The answer, my friends, is technology. From robotics to automation to a host of technological efficiencies, we make more with less, and that has had an impact on headcount. Where there are labor-intensive needs, wages have actually gone much higher, but demand for the positions has not moved in tandem.
A fair point to make here is that even when superior wages are available, many question the sustainability or stability of the position. Many factory positions are viewed as ad hoc, and the “on again, off again” nature of employment in the sector has caused a lot of people to pursue other endeavors. I am not sure I could come up with a solution for the cyclical reality there, but I do understand why people supporting a family would opt into something they deemed more reliable.
So, bottom line, this is for us
A sober, honest, judicious assessment would conclude that we have a far bigger challenge finding workers in the United States than we do jobs. Some workers have used their rational instincts and moved towards self-interest to opt out of the manufacturing sector due to reasons of lifestyle, physicality, or quality of life. Others have done an economic calculus that concluded stability was undesirable in the space due to cyclicality and sensitivity to economic downturns. And still others have seen wage premiums become more attractive outside manufacturing and “gone where the money is.”
But another inconvenient reality is that our manufacturing has simply “moved up the value chain.” We are a rich society, and we can buy a lot of things that can be made for a lower price elsewhere (apparel and textiles), and yet we can be a real leader in manufacturing high-tech items and various defense, aerospace, and high-end industrial machinery. However, that category of manufacturing naturally requires more skills, training, and education. The organic flow here (market forces) has moved to fewer but better manufacturing jobs in higher price-point sectors, while the lower-wage, lesser-desirable positions have become less needed. And I would do anything in the world to see all people, of all skill and education level, who desire to work hard and have a good life, find meaningful and fulfilling employment opportunity – and saying things like “learn to code” is an asinine, rude, condescending response to the social reality we face. Yet to argue that we have a problem with “manufacturing” in our country, versus an appetite for manufacturing work, is not helping anyone. We need more sober truth-telling, period.
In short, a variety of factors have contributed, and nearly all of them are outside state control, and likewise subject to being made much worse by state intervention.
Conclusion
We are blessed to make a lot of things in America, to sell a lot of things outside of America, and to have diverse multi-sectoral options for those looking to work here in America. We would also be insensitive and obtuse to fail to note that certain economic evolutions, unavoidable as they likely were, have created difficulty for certain people in certain circumstances (from agriculture to low-end manufacturing, etc.). What we do not have from a macroeconomic standpoint, though, is a situation where America is failing to produce. What we also do not have is a situation where everyone has to get a technology job or a services job, or otherwise forfeit gainful employment. I share Mike Rowe’s view that a golden age is coming for many in plumbing, welding, electrical, and various positions of skilled labor. American capital markets seem to agree! I am skeptical that we will add a lot of “factory” jobs in the years ahead, and certainly skeptical that we will do that as a percentage of the total labor force.
Ultimately, three principles will go a long way towards governing our thoughts in these interconnected subjects:
(1) Market forces and subjective human preferences are best left to their own devices, devoid of government planning and selection, lest foreseeable unintended consequences worsen the very matter we believe we are trying to improve.
(2) Never misidentify a cultural problem as a policy problem. The fundamental malady that has led to a decline in labor participation is spiritual at root, and not fixable from Washington D.C.
(3) Note the economic reality that shifts in labor dynamics do not mean fewer jobs, but different ones. Our whole society is about to learn this for the third time in 150 years with artificial intelligence. Dynamism can do short-term damage before it does long-term benefit, but it will always and for certain do long-term benefit for those who adjust accordingly.
(4) And finally, ignore the narratives that are intended to drive voting coalitions when it comes to economic decision-making. There is great meaning and dignity in blue collar work, white collar work, mental work, physical work, and all sorts of diverse activity that helps meet human needs. Economic forces respond and react, and capital will chase its most rational use (as it should be).
(5) As the Chart of the Week here shows, making more with less is the theme of the last thirty years. Identifying the reality correctly strikes me as a prerequisite to avoiding bad solutions.
Quote of the Week
“Many go fishing all their lives without knowing it is not the fish they are after.”
~ Henry David Thoreau
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So much to chew on this week. So much to think about. And not always in line with pre-conceived ideas. I welcome your feedback and civil disagreement, and wish you and yours a wonderful weekend.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
