Factories pause after blistering construction spending

Article originally posted on CoStar on April 23, 2025

As uncertainty about tariffs and trade policy continues to percolate, many are watching the current health and prospects of America’s manufacturing industry.

While recent data releases for March paint a mixed picture of the sector, more recent regional surveys of manufacturers noted trepidation that price increases could curb the potential for capital investment.

Manufacturing employment remained relatively flat in the first quarter of the year. According to the Bureau of Labor Statistics’ March jobs report, manufacturing payrolls were up about 4,000, a less than 0.1% increase, in the first three months of the year, but were down about 74,000, roughly 0.5%, on a year-over-year basis.

At the same time, manufacturing output increased by 0.3% in March, according to data from the Federal Reserve Board of Governors, which is its highest level since December 2018.

The largest jumps came in tariff-sensitive categories such as clothing (2.2%), business equipment (1.7%), information processing (1.3%), and automotive products (1%). This suggests firms were using the stockpiles of materials they imported earlier in the year, before threats of tariffs accelerated.

After a sluggish first two months of the year, retail sales grew 1.4% in March as shoppers purchased motor vehicles and parts, sales of which rose 5.3% in March; building materials and garden supplies, up 3.3%; sporting goods, up 2.4%; and electronics, up 0.8%. Improved weather drove some of the increase, such as in restaurants, which saw 1.8% monthly sales growth after declines in two of the prior three months. However, excluding furniture, categories requiring substantial shares of imported materials saw the largest increases.

The rush on durable goods and the increase in manufacturing production come in the context of shifting industrial policy. The Biden administration, which left office in January, focused on incentivizing advanced manufacturing through tax credits and billions of dollars in grants for producers of semiconductors and electric vehicles, among other clean energy projects, while keeping some targeted tariffs from the first Trump administration in place. By contrast, the second Trump administration has focused on lowering regulatory barriers for production while using trade policy as an incentive for reshoring manufacturing operations.

Manufacturing construction spending surged to $235 billion in the most recently released February 2025 data. That’s down slightly from a peak of $238 billion in June of 2024, but is nearly triple the $76.4 billion four years ago in February 2021. By contrast, total construction spending grew by less than 40% over the same period. Data on construction spending in March is set to be released in early May.

The surge in manufacturing construction can largely be attributed to stimulus funding originating in three bipartisan bills passed in 2021 and 2022: the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act.

However, the short-term impact on overall manufacturing production has been muted and counterbalanced by inflationary pressures. Manufacturing output peaked in February 2023 at about 4.6% higher than 2017 levels. With the uptick in March, production was 3.5% higher than 2017 levels.

The CHIPS Act has been criticized for environmental and labor regulations, along with delays and setbacks from grantees such as Micron, Intel, and Samsung. On the other hand, its success stories include Taiwan Semiconductor Manufacturing’s (TSMC) Arizona-based fabrication complex, which received $6.6 billion in grants and $5 billion in low-cost federal loans. The company says teh Arizona facility surpassed production at its Taiwanese facility last October and began producing the most advanced four-nanometer semiconductor chips in early January.

In March, TSMC announced plans to invest another $100 billion in the United States in addition to its initial $65 billion investment. At the same time, the Trump administration incorporated the CHIPS Act program into a new office, the United States Investment Accelerator, intended to reduce regulatory burdens and permit delays while negotiating additional investments.

Still, subsidized megaprojects are a specialized slice of broader manufacturing investment. Two recent regional surveys show that uncertainty around the Trump administration’s tariff policy is putting the brakes on manufacturers’ capital investment plans.

Respondents to both the Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey and the Federal Reserve Bank of New York’s Empire State Manufacturing Survey reported higher prices, with Philadelphia-area respondents reporting the highest price increases since summer 2022, declines in new orders, and a generally pessimistic outlook.

Capital expenditure plans also showed significant declines for the fourth consecutive month, indicating manufacturers project overall investment plans to be flat for the next six months. Though these surveys focus exclusively on manufacturers in the mid-Atlantic and Northeastern states, they may provide an early glimpse of broader April data releases.

While consumer sentiment plunged in March, the fourth consecutive month of declines, business sentiment hasn’t held up any better, especially for small businesses.

The recent National Federation of Independent Business survey of small businesses showed its Optimism Index falling 8 points in March over the prior month, its largest monthly decline since June 2022. The major contributors to the decline were people’s impressions of current business conditions and their expectations for sales.

The group’s Uncertainty Index improved a bit in March from highs seen over the past several months, but it remains similar to levels seen in late 2020, as the pandemic spread across the globe. When sentiment flags, businesses and consumers often become more cautious in spending and investing, the first steps of the economy sliding into a slowdown and perhaps even falling into recession.