The State of US Manufacturing in 2022 — And What It Means for Your Wallet

Serious busy young black factory engineer in hardhat and safety goggles examining milling lathe and repairing it while working at production plant.
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Although the U.S. manufacturing sector no longer dominates the country’s economy like it did through much of the 20th century, it still accounts for 12% of the nation’s total economic growth. But, like most global industries, U.S. manufacturing suffered heavily right from the onset of the coronavirus pandemic, and its operations are still recovering.

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This reality has had an effect not just on the manufacturing industry itself, but on the U.S economy and its consumers as well. Here’s a look at how U.S. manufacturing has been affected by the pandemic, along with a look at its current state and future projections. 

The Initial Slowdown

The initial economic response to the pandemic was devastating. In March and April 2020 alone, the manufacturing sector lost roughly 11% of its workforce, which amounted to about 1.4 million jobs. The consumer sector did no better, with monthly retail sales plunging 22%. Effectively, the whole world went into shutdown during those months; and, to some degree, it’s surprising that sales and manufacturing didn’t fall even further.

The Consumer Recovery

For all of the economic doom and gloom at the onset of the pandemic, the U.S. consumer rebounded incredibly rapidly. Part of this recovery was reflected in the stock market, which had its quickest recovery after a bear market — defined as a 20% or more downdraft — in history, lasting a mere 33 days.

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Although March and April 2020 were devastating for the economy, by June 2020, monthly retail sales already had eclipsed their pre-pandemic levels. By December 2021, sales were up 19% over pre-pandemic levels. But manufacturing has remained disrupted, having major ramifications for the global economy.

The Shortages: Causes and Effects

While surging demand normally would be great news for the manufacturing sector, persistent shortages have led to serious problems. While demand is soaring, manufacturers are still struggling with both supply chain disruptions and shortages of raw materials. In short, manufacturers are struggling to fill orders because they don’t have enough raw materials to produce enough goods or they can’t get their products shipped in a timely fashion.

Higher fuel costs also are hurting product delivery. According to the Freightos Baltic Global Index, since the pandemic began, the cost of shipping a container from China to New York has spiked from $2,609 to $17,488, while the price to America’s West Coast has skyrocketed from $1,359 to $14,637. Shipping also has slowed dramatically, with freight taking 85% longer to reach America from China. Costs like these are inevitably passed along to customers, resulting in surging prices.

The Current Inflationary Crisis

All of this leads us to the current inflationary crisis. The January 2022 CPI rose 8.5% on a year-over-year basis, reaching the highest level since December 1981. While there’s never a single cause to inflation, when demand outstrips supply, basic economics say prices will go up.

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Elevated levels of consumer spending, fueled in part by government stimulus payments throughout the pandemic, along with the manufacturing shortages described above have left the economy out of balance. This is perhaps nowhere more evident than in the booming housing market, which has shown unprecedented strength. Add in the rising cost of fuel, and costs for both U.S. manufacturing and the American consumer show no signs of slowing.

The Resolution

The Fed kept interest rates near zero throughout the pandemic to help prevent the economy from collapsing. Now that the economy is expanding and inflation is skyrocketing, it has embarked on a course of interest rate hikes that will likely continue through 2022 and perhaps into 2023.

The intended effect is to get inflation under control and slow down the overheated economy. But rising interest rates also may raise costs for U.S. manufacturers and slow down demand for its products. This could potentially tip the U.S. economy into recession.

The bottom line is that the future is uncertain when it comes to U.S. manufacturing and the American economy. The longer the supply chain shortage and inflationary pressures persist, the more you should expect that your wallet will take a hit. Economic and fiscal policy eventually may remedy the situation; but, for now, you should prepare for the possibility that rising costs are here to stay.

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