Manufacturing Is Losing Steam — Why Tariffs, Costs and Productivity Are Costing Factory Jobs

The September jobs report delivered mixed signals: the U.S. economy added 119,000 payroll jobs, yet the unemployment rate rose to 4.4%, its highest level since October 2021. Behind those headline numbers lies a worrying trend for one politically and economically important sector — manufacturing. Factories lost 6,000 jobs in September, marking the fifth consecutive month of declines.

What's happening in manufacturing?

Manufacturing employment is down roughly 194,000 jobs (about 1.5%) from its most recent peak in February 2023. That decline predates the current administration, so tariffs alone do not explain the full picture. Still, import taxes and trade tensions have played a meaningful role: tariffs raise the cost of imported inputs, and retaliatory duties reduce demand for U.S. exports, squeezing domestic producers.

Why tariffs matter — and why they aren’t the only factor

A key, often overlooked fact is that approximately half of U.S. imports are intermediate goods — parts and inputs used by domestic manufacturers rather than final retail products. Making those inputs more expensive raises production costs and can depress factory output and employment. A Federal Reserve analysis of earlier tariff rounds found that any protective benefit for some industries was more than offset by higher input costs and retaliatory foreign tariffs that reduced exports.

Evidence from manufacturers

Contemporary industry surveys reinforce these concerns. The Institute for Supply Management’s (ISM) monthly manufacturing survey reports contracting employment at respondents’ firms in 31 of the past 34 months. Respondents’ comments from October highlight widespread uncertainty and higher costs:

"Business continues to remain difficult, as customers are cancelling and reducing orders due to uncertainty in the global economic environment and regarding the ever-changing tariff landscape." — chemical products manufacturer

"Tariffs continue to be a large impact to our business. The products we import are not readily manufactured in the U.S., so attempts to reshore have been unsuccessful. Overall, prices on all products have gone up, some significantly. We are trying to keep up with the wild fluctuations and pass along what costs we can to our customers." — machine producer

"The tariff trade war has negatively impacted agricultural export markets, driving down demand and price. This negatively impacts farmer revenue and the likelihood of farmers investing in new equipment." — farm machinery manufacturer

Longer-term forces: productivity and global competition

Broad historical research on U.S. manufacturing (1949–2025) shows that large employment declines typically occur during periods of rapid productivity growth paired with weak domestic demand. The 2000–2010 "China shock" is the clearest example, when cheaper imports and productivity gains combined to eliminate millions of factory jobs. Today, manufacturing productivity has recently strengthened, and wider adoption of automation and artificial intelligence could accelerate efficiency gains and reduce labor demand.

Demand indicators also point to cooling activity. The ISM new orders index — a gauge of incoming demand for manufactured goods — has averaged about 48 since March 2023 (contraction), compared with an average of 57 in the two prior years.

What could reverse the slump?

If tariffs are doing more harm than good, policy makers should consider alternatives that directly bolster domestic capacity. Strategic industrial policy — targeted incentives, public investment, and careful regulatory design — can help where market incentives underinvest or national-security risks exist. Priority areas include clean-energy manufacturing, battery storage and grid transmission, semiconductor fabrication, and critical-minerals processing.

Designing effective industrial policy requires sustained, expert-driven planning and careful implementation: grants, tax incentives tied to outcomes, public R&D investment, and workforce development programs that reskill workers for higher-productivity roles. Without deliberate, evidence-based action, structural forces and trade-related costs make a prolonged manufacturing slowdown more likely.

Sources: Bureau of Labor Statistics, Institute for Supply Management, and a Federal Reserve analysis of tariff effects.