Don’t call it a comeback for manufacturing investment in the US

The Inflation Reduction Act and the CHIPS Act that passed last summer are spurring a sharp rise in investment in new manufacturing plants. The revival is concentrated in electronics, reflecting the targeted subsidies and doesn’t appear to herald a broad-based reshoring of manufacturing to the US. This isn’t surprising as the age of its manufacturing capital stock and high unit labor costs put the US at a disadvantage. Therefore, reshoring will be concentrated in an isolated number of industries, including pharmaceuticals, batteries, chips, and personal protective equipment.

What you will learn:

• Construction spending on new manufacturing facilities jumped 60% y/y in March, nearly all in electronics, which includes new chip fabs and battery plants for electric vehicles, both of which receive heavy subsidies under recent legislation. Excluding electronics, manufacturing structures investment has been much weaker, and investment in equipment and R&D is slowing.
• Investment in manufacturing structures accounts for only 3.5% of private fixed investment, so even if recent sturdy growth rates are sustained, it doesn’t warrant a change to our forecast for GDP. To have a more significant economic impact, we’d need to see a spillover into stronger business spending on equipment and R&D, which are much larger components of business investment. For now, any spillover effects have been overwhelmed by Fed policy tightening and stricter lending standards, which are weighing on broader investment growth.