April 7 2025

Hi everyone, my name is Taylor St. Germain with ITR Economics and welcome to this edition of TrendsTalk. We at ITR are your apolitical and unbiased source of economic intelligence and today I wanted to really zero in on the manufacturing industry.

Where are we in the business cycle? Where are we going and what do we need to do to prepare? And I’ll also call out some key industries, manufacturing verticals if you will. So we can understand a little bit more on a granular level about where these different verticals are in the business cycle compared to the overall manufacturing space.

So the very first thing I wanted to call out is our data series US Total Manufacturing Production, that comes from the Federal Reserve, and it is our benchmark for manufacturing activity here in the United States. Now this is a subset of US industrial production, the data set we talk often about, but I really wanted to zero in on manufacturing today.

Now if you’ve heard ITR, we’ve been talking about this growth that we should be preparing for in ’25 and ’26 and beyond. But many of you might not be feeling the same level of optimism that we as economists have currently. And so I wanted to share some data points that hopefully give you some confidence in the growth that we’re preparing for.

When I look at where Total Manufacturing Production is, as we’re talking today, the year over year growth rate is perfectly at 0%. We are flat right now compared to the year prior. And that’s why I wanted to call out this index today because again, you might not be feeling that positivity given we’re flat with the year prior. However, if you look at the internal data, the 3/12 rate of change, that has moved up, has improved, to a positive 0.7%. And as you know from following ITR, the 3/12 leads the 12/12 growth rate. And so despite the fact that the annual growth rate, that 12/12 is at zero, the 3/12 is already moving up. And that’s the first sign that we have to suggest that some of this momentum is building.

As we look forward, we are expecting manufacturing to grow in ’25 and ’26. And besides looking at the internal trends, we have to rely on our leading indicators for that. And one leading indicator that I like to call out that has almost a perfect correlation with manufacturing is the Manufacturing Capacity Utilization Rate. That is a seven month leading indicator to manufacturing activity.  And when I say Manufacturing Capacity Utilization Rate, what I’m really discussing is how much capacity are we utilizing. And anytime that leading indicator is pointing up, it highlights we’re utilizing more capacity. And that is exactly what that indicator is doing as we’re talking here today.

So we are seeing that uptick in utilization, which means we’re getting busier and we’re utilizing more capacity. And that tells us with confidence that this improvement that we’re calling for in manufacturing activity is likely to persist for at least the next seven months. That’s really encouraging to us.

Now, again, what I’ll highlight is not every manufacturing industry is positive yet. If we look at the beverage industry, if we look at construction machinery, farm machinery and equipment, so the Ag space, all of those data sets are still negative. Beverage is down 3.4% year over year, still in phase D recession. Construction machinery is down 6.4% and farm machinery is down 7.2%.

However, on the flip side, if you look at the high tech manufacturing side, that’s semiconductors, communications equipment, electronics, computers, that is actually an accelerating growth of 8.5%. So my intention of telling you this is it’s a little bit of a mixed bag in manufacturing. Some industries like high tech are already growing. Some industries like beverage, ag and construction are still down below the year ago level. And that shouldn’t come as a surprise given again, that overall manufacturing index is essentially flat from the year prior.

So what’s the takeaway from this? Whether we’re negative or whether we’re positive, the leading indicators are continuing to point to improvement. So for the industries I mentioned that are negative, they’re likely to get less negative as we continue throughout this first half of 2025. The industries that are already accelerating are likely to continue to accelerate further.

By the time we get into the second half of 2025, if you look at our Trends Report manufacturing dashboard, we are projecting most every vertical to be positive. So we’re still at that point as we sit here in the first half of 2025 where we’re getting some mixed signals from where markets are, but the leading indicators aren’t giving us mixed signals and they’re suggesting that this improvement continues.

So what do we need to do as businesses? Well, we really need to be taking the time now when things are a little bit slower to take a step back and understand the capacity, the labor that we’re going to need as this economy heats up into the second half of ’25. The biggest mistake we can make right now is assuming that what we’re experiencing today is simply going to continue throughout the year.

The question for me is not, will we grow in ’25 and ’26? It’s can we keep up with this growth? And so we really need to be looking at that one to two year plan now and making the moves in our business, whether it’s driving operational efficiencies, adopting technology, increasing capacity, like I said, to ensure that we’re prepared for this growth that’s coming our way.

I’m here to provide that optimism because I have the benefit of looking at all of these different leading indicators. And for me, the story is pretty clear. So I know there’s a lot of noise. I know there’s a lot of uncertainty and that’s why it’s important to take a step back, look at the fundamentals that we’ve always used to forecast the economy, which is the leading indicators. And I think you’ll see a rosier picture as we look later this year.

I sure hope you found this information helpful. Thanks for joining me on this episode of TrendsTalk. Please remember to like and subscribe to TrendsTalk wherever you listen to your podcasts. And I’m looking forward to seeing you on the next one. Take care for now.