U.S. manufacturing recovery remains uneven across factory sectors

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US manufacturing recovery uneven

Highlights

U.S. factory output rose 0.3% in September despite a 3% drop in auto production, with ISM noting a ninth consecutive month of sector expansion.
Net 40,000 manufacturing jobs were added in the 12 months to September, but all gains came from advanced industries like chemicals, machinery, electronics, and transportation equipment.
Federal Reserve tightening and higher borrowing costs threaten to constrain advanced manufacturing's rebound, as labor-intensive sectors already face rising costs and foreign competition.

Output growth led by advanced industries

As reported by Axios, U.S. factory output rose 0.3% in September despite a 3% drop in auto production, adding to signs that the sector is regaining strength. The Institute for Supply Management's manufacturing index also shows a ninth straight month of expansion, with new orders accelerating and backlogs of unfinished work increasing.

Even so, the improvement in headline activity is not spreading evenly through the labor market. ISM says five of the six largest manufacturing industries report rising new orders last month, but only two, computers and electronics and transportation equipment, report increased employment.

An analysis by Gad Levanon, chief economist at the Burning Glass Institute, shows U.S. manufacturers add a net 40,000 jobs over the 12 months ending in September. Those gains come entirely from advanced manufacturing, which accounts for 38% of factory employment, while chemicals, machinery, computers and electronics, and transportation equipment add 56,000 jobs and the rest of manufacturing loses a combined 16,000 jobs.

Borrowing costs threaten a narrow rebound

Levanon says the recovery is real but narrow, driven by industries producing equipment for the AI and energy buildout and by sectors benefiting most from reshoring. Employment outside advanced manufacturing is barely above its 2016 level, underscoring years of stagnation across much of the factory base.

James Knightley, chief international economist at ING, says the Federal Reserve's tightening cycle could widen the divide before threatening the broader recovery itself. Traditional, labor-intensive manufacturers are already facing high costs and foreign competition, while advanced producers are benefiting from an investment boom that may support growth despite higher borrowing costs.

If financing costs continue to rise and investors start questioning technology valuations, the industries now driving the rebound could also come under pressure. Knightley says that reliance on external financing leaves the sector vulnerable to a slowdown.

In our earlier article on the U.S. AI data center buildout, we examined how higher interest rates, construction delays, and power constraints are making it harder to turn massive expansion plans into operational capacity. We also noted that only a minority of planned projects look credible, and that weakening investor sentiment and cost overruns are increasing the risk that funding conditions tighten further.

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