America Re-emerges as Industrial Powerhouse

Not Just a Service Economy

In recent years, there has been a shift in the economic landscape of the United States, challenging the long-standing narrative of America as a predominantly service-driven economy. The current surge in American industrial activity, marked by historic highs in manufacturing production, reflects a nation reasserting itself as an industrial powerhouse. This resurgence is fueled by strategic governmental policies, evolving corporate philosophies, and technological innovations reconfiguring the country’s production capabilities. To understand American industrial growth, we need to connect the past to the present, identifying the pivotal moments that shaped manufacturing and what it means for the future.

As indicated by the State Department’s Office of The Historian, during the 1973 Arab-Israeli war (known as the Yom Kippur War), Arab members of the Organization of Petroleum Exporting Counties (OPEC) imposed an embargo against the U.S. in retaliation for an American decision to re-supply the Israeli military. That prompted widespread gas shortages, which “acutely strained a U.S. economy that had grown increasingly dependent on foreign oil.”¹

To put this into perspective, in October 1973, when the Yom Kippur War raged, U.S. Field Production of Crude Oil stood at approximately 9.2 million barrels of oil per day.² Despite the impetus supplied by the oil embargoes of the 1970s, U.S. field production dipped below 4 million barrels of oil per day by the fall of 2008.³ Based on decades-long trajectory, one might have thought that America was destined to experience further declines in production. But the past is not prologue, and American innovation obliterated pre-existing trends.

The expansion of oil production from shale resources resulted in a boom of production that commenced early during the prior decade. By the end of 2023, American production had surged to an all-time national record of 13.3 million barrels of oil per day.⁴ Not only has this supported American consumption, it has helped to meet global demand. This helps explain why oil prices remain relatively well-behaved despite raging conflicts involving oil-rich Russia and the Middle East. As reported by the Wall Street Journal, last November, shippers “moved more oil out of the U.S. than what was produced in Iraq, OPEC’s second-largest member, at a record 4.5 million barrels a day.”⁵ Iraq was also the world’s fifth largest oil producer in 2023. Canada was fourth, Russia third, Saudi Arabia second, and America first.⁶

Shale-related production of oil and natural gas has helped fuel construction activity, including the construction of well pads, pipelines, and production facilities that rely heavily upon cheap natural gas as a feedstock. The connection between construction and surging domestic industrial production does not end there.

More recently, American manufacturing production has become more muscular. For decades, there was a simple mantra among many American manufacturing CEOs – “I am a profit maximizer, and therefore must be a cost minimizer, and to minimize costs, I probably need a facility in China, Mexico, or some similarly situated low-cost society.”

But a confluence of forces has induced more CEOs to consider producing in America. This list is lengthy, and includes the massive supply chain challenges of the past, historically volatile energy prices that penalize lengthy journeys, a desire to better protect intellectual property, the opportunity to turn to workable courts when litigation becomes necessary, and a desire to avoid the intrusion of foreign governments. Suddenly, America is benefitting from a wave of reshoring and near-shoring. Federal government legislation such as the Inflation Reduction Act (IRA) and Chips and Science Act (CHIPS Act) have further fanned the flames of industrial rebuilding in America.⁷ Among those who have noticed are the nation’s contractors.

Beginning in mid-2021, construction related to manufacturing began to surge as global supply chains remained largely dysfunctional amid global pandemic. From May 2021 to September 2023, manufacturing-related construction rose more than 160 percent.⁸ Roughly $3 in every $10 spent on private nonresidential construction has been going toward building factors. More recent data indicate that this pattern has been altered. By January 2024, manufacturing-related construction spending was 190 percent above its May 2021 level.⁹

The CHIPS Act and IRA are supplying billions of dollars in incentives to those willing to invest in expanding domestic industrial capacity. Among the largest beneficiaries of the CHIPS Act will be semiconductor producers like Intel and Micro. That said, there are influences beyond federal tax credits. Even before the CHIPS Act and IRA, firms had begun to ramp up their investments in domestic computer/electronic manufacturing. From 2017 to 2020, investment in those types of facilities expanded 465 percent, from $2.1 billion to $9.2 billion.¹⁰

The pandemic has merely served to further catalyze such production. With people shut in their homes, many turned to their computers, Pelotons, PlayStations, and other devices requiring computer chips. But there were not enough available, which in turn plagued auto manufacturers and others desperate to secure chips.

In response, manufacturers poured even more financial capital into capacity. In 2021, investment in computers and electronics manufacturing expanded another 32 percent.¹¹ By 2022, such spending had risen to an astonishing $38 billion, and America is just getting started.¹² Certain megaprojects remain under development, including $40 billion to be eventually invested by TSMC (Arizona), Intel’s massive investments in Arizona and Ohio, and a $25 billion Samsung plant in Texas.^{13 14 15}

The Chemists Make Their Mark

Prior to the Great Recession (2007-09), investment in chemical manufacturing had been growing steadily in the U.S., but faltered during a period associated with a collapsing housing bubble. As was the case with many economic activities, growth resumed around 2011. Between 2011 and 2015, investment in the category rose 415 percent, in part of reflection of how weak investment in the segment had been during the aftermath of deep economic downturn.¹⁶

While investment in chemical manufacturing has leveled off more recently, investment in the category is responsible for approximately 30 percent of all domestic investment in industrial facilities.¹⁷ At the heart of this phenomenon is ultra-cheap American natural gas, which supplies U.S. manufacturers with massive competitive advantage. The upshot is that chemical manufacturing is likely to be another driver of industrial construction during the years/decades ahead. Other drivers of industrial capacity expansion include defense, healthcare, and inputs to alternative energy production.

Looking Ahead

Recent events have rendered it more likely that America’s industrial muscularity will continue to build. Supply chain issues related to the Red Sea and Panama Canal have reinforced the benefits of producing output closer to final consumers. Moreover, with more supplies locating to the U.S., the allure of being proximate to suppliers continues to expand. For decades, many American companies relocated their production out of the U.S. because their suppliers had moved elsewhere. In many instances, the situation has been reversed. Finally, both presumptive major party presidential nominees have demonstrated support for domestic production, with at least one candidate suggesting the imposition of even larger tariffs on foreign producers, thereby further catalyzing the advantage of making it in America.

Sources

1. “Oil Embargo, 1973–1974”. Department of State: Office of the Historian. https://history.state.gov/milestones/1969-1976/oil-embargo
2. “Petroleum & Other Liquids”. U.S. Energy Information Administration.
3. Ibid.
4. Ibid.
5. Eaton, Collin. “Shale Is Keeping the World Awash With Oil as Conflicts Abound”. The Wall Street Journal. January 1, 2024. https://www.wsj.com/business/energy-oil/shale-is-keeping-the-world-awash-with-oil-as-conflicts-abound-7da38717
6. “The Top 5 Oil Producers of 2023”. Yahoo! Finance. December 21, 2023. https://finance.yahoo.com/news/top-5-oil-producers-2023-010000253.html
7. Kannan, Vishnu and Jacob Feldgoise. “After the CHIPS Act: The Limits of Reshoring and Next Steps for U.S. Semiconductor Policy”. Carnegie Endowment for International Peace. November 22, 2022. https://carnegieendowment.org/2022/11/22/after-chips-act-limits-of-reshoring-and-next-steps-for-u.s.-semiconductor-policy-pub-88439
8. “Total Construction Spending: Manufacturing in the United States”. St. Louis Federal Reserve Economic Data. https://fred.stlouisfed.org/series/TLMFGCONS
9. Ibid.
10. “Construction Spending: Historical Value Put in Place, Annual, Private 2012-2023”. U.S. Census Bureau. https://www.census.gov/construction/c30/historical_data.html
11. Ibid.
12. Ibid.
13. Kinery, Emma. “TSMC to up Arizona investment to $40 billion with second semiconductor chip plant”. CNBC. December 6, 2023. https://www.cnbc.com/2022/12/06/tsmc-to-up-arizona-investment-to-40-billion-with-second-semiconductor-chip-plant.html
14. “Intel’s biggest fab is coming to Ohio, and Arizona is the blueprint”. Arizona Technology Council. https://www.aztechcouncil.org/intels-biggest-fab-is-coming-to-ohio-and-arizona-is-the-blueprint/
15. Alper, Alexandra, Stephen Nellis, and Heekyong Yang. “Exclusive: Samsung’s new Texas chip plant cost rises above $25 billion”. Reuters. March 15, 2023. https://www.reuters.com/technology/samsungs-new-texas-chip-plant-cost-rises-above-25-billion-sources-2023-03-15/
16. “Construction Spending: Historical Value Put in Place, Annual, Private 2012-2023”. U.S. Census Bureau. https://www.census.gov/construction/c30/historical_data.html
17. Ibid.