America is in a factory boom again. Even a recession may not bring it down this time

Washington, DC CNN — 

On a warm Saturday morning in July, as Kathie Leonard planned to set out on her boat for a day on the water off the coast of Maine, her phone rang. The call was from the head of the Maine Department of Economic and Community Development, asking if Auburn Manufacturing — the specialized textiles maker Leonard runs — would be interested in hosting “the president” in the coming week.

At first she replied, “President of what?” Leonard told CNN. Then the Maine official clarified she was referring to President Joe Biden.

“I was like, ‘Really? Is this a true call?’” Leonard said. “But I was eventually convinced and said yes, of course we’re going to do it. I mean, you don’t say no to such an opportunity.”

The following Friday at Auburn Manufacturing, located about an hour north of Portland, Biden touted the success of his economic agenda, pointing to manufacturers’ rising investments in construction projects as evidence.

President Joe Biden speaking at Auburn Manufacturing Inc., in Auburn, Maine, Friday, July 28, 2023, before signing an executive order to encourage companies to manufacture new inventions in the United States.

In the growth of blue-collar work, Biden has much to celebrate. In July, construction spending from manufacturers rose about 71% from a year earlier, according to Commerce Department data, and manufacturers had 106,000 more employees in August compared to a year earlier, despite business surveys showing softening consumer demand.

But the good times for the US economy may not last. A few days before Biden’s speech in Maine, the Fed approved raising interest rates to their highest level in more than 22 years, continuing an aggressive inflation-busting campaign.

Now, as the US central bank looks to enter the final phases of its historic inflation battle, it’s unclear how much the rate hikes will weigh on the economy. But economists argue the fiscal largesse of recent years is providing an unshakable economic boost to manufacturing.

Some manufacturing bosses, like Leonard, are confident their companies could handle a recession.

The suspense caused by the Fed

Since taking office in 2021, Biden has signed into law a number of major spending packages to funnel billions of dollars toward manufacturing, including a bipartisan infrastructure bill and the CHIPS and Science Act. That has allowed manufacturers to start planning new factories to ramp up production, according to government data.

The injection of federal funds and the country’s ongoing shift toward renewable energy have helped spark the beginning of a so-called “manufacturing boom” in the United States, according to some economists — notably Nobel Prize-winning economist Paul Krugman. Goldman Sachs analysts recently estimated the US manufacturing industry could add 250,000 jobs over two years.

But the steady rise in construction spending from manufacturers hasn’t yet translated into significantly higher levels of manufacturing employment or a sharp uptick in output.

Although economic optimism has grown among US consumers and fears of a severe downturn from economists have greatly diminished in recent weeks, the economy isn’t out of the woods just yet.

How much of a threat is weakening demand?

There are reasons for concern. Business surveys from S&P Global and the Institute for Supply Management show that the US manufacturing sector has been contracting for several months. The surveys reflect weakening consumer demand coupled with shrinking backlogs and a persistent difficulty in hiring. ISM’s latest survey showed economic activity among manufacturers contracted for the 10th straight month in August.

“Customer orders have softened. This is likely due to customers’ increased confidence in the supply chain, (which) has them reducing their inventories. Customers are also being pinched with higher interest rates,” a food, beverage and tobacco products manufacturer told the ISM in its August survey. “Additionally, consumers are feeling their purchasing power eroded by stubbornly high inflation, so they are purchasing less.”

The outlook isn’t too rosy — at least in the short term.

“It’s not a big surprise that the combination of higher interest rates and a moderation of the pandemic surge in consumer purchases has led to weaker readings in the PMIs, which are short-term data,” said Scott Paul, the president of the Alliance for American Manufacturing. A PMI, or purchasing managers’ index, is a business survey used to gauge levels of economic activity — the same ones released by S&P Global and ISM.

Historically, manufacturing has been hit hard in economic downturns. During the Great Recession, which lasted from December 2007 to June 2009, manufacturing job losses totaled more than 2 million employees, or 15% of its workforce, according to a 2011 paper from the Labor Department.

If the economy does enter a recession, Paul argues mass layoffs could be avoided because of “public policies that spurred infrastructure investments, manufacturing demand, and clean energy incentives,” referring to the federal spending packages and their provisions.

Economists say manufacturers’ increased spending on building factories reflects their confidence in the long term, even if data show demand is expected to slow in the short term. It takes time to build a factory. The construction spending figures imply investments toward building factories.

However, Paul said it’s not clear how certain manufacturers who aren’t directly benefiting from federal dollars — such as manufacturers of packaged food or clothing — would fare in a recession.

But Auburn Manufacturing’s Leonard is confident about her company’s ability to weather a recession, saying “we’ve been through ups and downs.”

Indeed, Leonard has seen much higher interest rates in the past.

“When we built our first building, interest rates were around 14% or so, and that was in the early ’80s,” she said. The Fed’s benchmark lending rate is currently at a range of 5.25-5.5%. It hovered between 8% and 19.5% in the early 1980s.

Likewise, Julianna Keeling, founder and chief executive of Terravive, a manufacturer of sustainable single-use consumer products, said she believes her business would not do as well during a recession, but would avoid a deep slump due to “very strong demand from people wanting to use disposable, sustainable products that they don’t have to feel guilty about discarding.”

Manufacturers are still paying close attention to the Fed

Companies typically take out corporate loans when expanding their operations, so higher borrowing costs could stymie some manufacturers’ growth plans.

The developers of River Pointe Commerce Park, a proposed industrial park in eastern Pennsylvania’s Lehigh Valley, say demand for leases from manufacturers has been strong. However, Lou Pektor, one of the developers, said “the Fed factors into everybody’s thinking” — especially when it comes to growth plans.

“We’ve seen some plans go on hold or on a slower burn until those companies see what happens with interest rates and the economy,” he said. It is the typical dynamic during times of economic uncertainty — waiting for some clarity before making a major business investment.

Jennifer Harris, former special assistant to Biden and senior director of international economics at the National Economic Council and the National Security Council, said she thinks a soft landing — a scenario in which inflation slows to the Fed’s 2% goal without a sharp uptick in unemployment or a recession — is within reach and would bode well for manufacturers.

Recession or not, the bull case for US manufacturing has the industry — and Biden — in a good mood.