U.S. Manufacturing Surges Despite Tariffs, Not Driven by Them

One of the more frustrating quirks of the policy-wonk world is weighing in on information that is available but lagging and is later revised or clarified by newer data releases. In January, I argued that the American manufacturing renaissance promised by the White House was “missing in action” because manufacturing sentiment stayed depressed through last year and actual output looked notably weaker in the autumn. Since then, however, both sentiment and output have improved: Industrial production has risen for seven straight months, and manufacturers report brighter expectations—a sharp turnaround from the pessimism seen in 2025. The timing could not be better.

The Trump administration has certainly taken note of this reversal, recently bragging about the Institute for Supply Management’s (ISM) latest manufacturing purchasing managers index (PMI), which they say shows that “U.S. manufacturing activity surged in July at the strongest pace in over four years—driven by surging demand, record output, and a wave of new hiring.” The vice president is basking in the glow, White House trade adviser Peter Navarro is calling it a “robust revival aided by tariffs and tax cuts,” and notable protectionists are cheekily pointing to the PMI as proof that anti-tariff “think tanks, economists, and columnists” must be out to lunch (ahem, we’re not).

The new tale from tariff supporters—who seldom distinguish correlation from causation—is that the ongoing upswing in manufacturing is a clear triumph of Trump’s trade policy.

But there are several reasons to be skeptical of that storyline. The recent growth in U.S. manufacturing is real but has been overstated in some surveys. More crucially, the concrete data available show that the uptick is being propelled by non-tariff forces—forces that have more than offset a tariff headwind. In fact, fresh research suggests American factories would likely be performing even better absent the tariffs. Let’s take a closer look.

The first obstacle to the tariff boosters’ narrative is subtle but significant: much of the recent triumphalism around tariffs rests on PMI surveys that gauge short-term industry sentiment and help project near-term trends but can misstate nationwide momentum and longer-run trajectories. As economist Dave Hebert recently explained, the PMI records the share of purchasing managers in various U.S. manufacturing sectors who report rising, falling, or unchanged orders, employment, prices, and other business activity. The index only captures the direction of change, not its magnitude. Thus, a giant conglomerate like Ford could lay off 1,000 workers while two small auto firms each hire five, and the PMI would register 66.7—an impression of solid expansion even though overall employment fell by 990.

The PMI’s signal of rising inventories and slower deliveries (which can reflect backlogs from strong demand) can also be misleading: both are treated as clearly positive by the ISM even when, in the real world, they may reflect deteriorating external conditions (for example, Iran-related stockpiling and supply-chain bottlenecks). Consequently, a portion of the PMI’s recent “strength” could be driven by costly frictions created by the Iran situation and by tariffs—frictions not something to trumpet as a win.

Another issue with PMI surveys is that, as Bloomberg’s Shawn Donnan noted, they track only “how purchasing managers feel about this month versus the one before,” meaning that “if this month is marginally better than a lousy one before it, the index goes up.” In January, I pointed out 2025’s long string of contractionary PMI readings because they continued the poor conditions from earlier months—persistently pessimistic manufacturing sentiment that ran counter to the administration’s tariff-driven-boom narrative. That sentiment has improved, but—as Donnan observes—“what the ISM is really showing so far this year is a short-term bounce in sentiment from very low levels.” In other words, it’s a few steps up after many steps down.

Finally, the manufacturing surveys reflect a broadly negative stance toward tariffs. The ISM PMI’s latest prices-paid index shows that “raw materials prices rose for the 22nd straight month” due to tariffs and Iran, while many tariffed inputs (especially metals) remain scarce. Meanwhile, the commentary accompanying the PMI reports—actual quotes from people working in surveyed U.S. manufacturing companies—has consistently framed tariffs as an obstacle, not a tailwind. As The Economist noted in March:

The latest ISM reports continue this pattern and are echoed by other surveys. As I noted in Bloomberg a few weeks ago, the National Association of Manufacturers has consistently found that trade-related uncertainty has been members’ top challenge since early 2025 (now only slightly eclipsed by Iran). American manufacturers’ takeaway on tariffs is clear: they are a problem to manage, not a solution.

Even amid these concerns, real-world data do show a rise in U.S. manufacturing activity, particularly in 2026. The Federal Reserve’s industrial production index indicates domestic manufacturing output has been climbing steadily since the Trump administration took office, aside from a several-month dip late last year. 

That’s encouraging for the sector, but there’s little reason to attribute it to Trump’s tariffs. More plausibly, the momentum is occurring despite them.

First, three powerful drivers coincided with the 2025-26 tariff period and are the most likely engines of U.S. factory output. On the supply side, the One Big Beautiful Bill Act restored and made permanent provisions allowing U.S. businesses to immediately deduct spending on equipment, machinery, and research and development (R&D), and the law temporarily permitted the same for spending on structures, effective January 2026. As the Tax Foundation explains at the linked source, research shows that lowering the after-tax cost of these business inputs boosts investment and growth, and they estimate that the OBBBA’s permanent expensing provisions will lift long-run GDP by a meaningful amount (0.7 percent). As I and others have argued for years, these neutral, free-market reforms tend to benefit large, capital-intensive manufacturers the most, aligning with the current acceleration in U.S. manufacturing. (The temporary expensing provisions might give a short-lived boost but won’t affect long-run growth; they should be made permanent.) The White House, for what it’s worth, has acknowledged the same idea: its official press release credits business tax cuts rather than tariffs for the current manufacturing “boom.”

On the demand side, the U.S. artificial intelligence push—now totaling trillions of dollars in new spending that dwarfs prior infrastructure booms—has become a major, direct source of orders for American manufacturers, since it supplies both the gear to construct data centers (bulldozers, trucks, structural steel, etc.) and the components that go inside them (electrical gear, server racks, semiconductors, etc.). To grasp the scale of this demand, consider a recent GE Vernova report noting that its electrification unit “sold more grid equipment, including substations and transformers, to data-center clients in Q1 than in all of last year.” They’re certainly not alone in this.

Third, the Iran conflict has boosted both domestic energy output and the price of energy-related products, and it has spurred a rush of stockpiling among firms hoping to avoid potential future shortages. Bloomberg reports that this short-term push helped drive a notable manufacturing expansion in the spring. Unlike tax reform and perhaps AI, this is a temporary sugar hit—additional purchases now can mean fewer purchases later—but it still matters when evaluating the current state of U.S. manufacturing. Tariff proponents rarely acknowledge it.

The hard numbers paint an even starker picture. For one thing, the recent growth has been historically modest: The Fed’s manufacturing index in July 2026 stood at 99.3—barely higher than its level in February 2020 and roughly 2.5 percent below where it stood in mid-2018, when the first tariffs of the era began to bite. The pace of the current expansion isn’t spectacular either: Output is up about 1.3 points over the last year, versus a 2001-2019 median of 1.4. The rebound is pleasant but not a renaissance.

A deeper look reveals bigger problems for the pro-tariff case. Most basically, the manufacturing rebound—and the growth in the industries driving it—began months before Trump’s new tariffs took effect in March 2025:

(Several other sectors not shown here are still shrinking—more on that in sec.) Given these trends and similar patterns in manufacturing productivity, the 2025-26 “boom” isn’t so much a “Trump-related phenomenon” as it is a continuation of a rebound that started earlier, likely tied to the AI rollout and the broader business cycle.

The next strike against the tariff success story comes from import volumes during the recent “boom.” In a protectionist framework, imports and domestic production are substitutes: curb the former with tariffs and the latter should surge. Yet this is not the case for goods imports overall or for the sectors driving the Fed’s manufacturing numbers. Notably, data from the Bureau of Economic Analysis show that real imports of capital goods, excluding autos, rose by 39 percent from Q4 2024 to Q2 2026—the largest sustained increase outside the post-pandemic rebound and one that occurred alongside a substantial rise in domestic production of similar items:

Strangely, the White House’s press release and Council of Economic Advisers Chair Kevin Hassett acknowledge this pattern, bragging that the “historic peak” in capital goods imports signals a major U.S. factory expansion. The more plausible trigger, however, is the AI buildout: vigorous domestic production of data-center inputs alongside rising imports of the same—especially from Mexico—driven by a once-in-a-generation demand shock, not tariffs that deter foreign competition and spur new factories.

Indeed, the hard data show that U.S. tariffs and manufacturing performance have moved in opposite directions since Trump came into office. Using the U.S. International Trade Commission DataWeb, we can tally the tariffs collected on goods within the Fed’s industry groups over the past few years and gauge the actual protection afforded to those sectors. The pattern is not what a tariff-boost narrative would predict.

First, the top two industries fueling much of the recent U.S. manufacturing expansion—computers/electronics and aerospace—receive the lowest (and even declining) tariff protection, while the industries enjoying the highest protections are contributing little or even shrinking:

The trend in production capacity is even more troubling for the pro-tariff case: the lightly protected sectors are growing while the highly protected ones are contracting:

Even a supposed tariff winner—the moderately protected U.S. auto sector—is not as strong as it appears. Yes, motor vehicles and parts output has grown since 2024, but total production capacity (as shown above) and fixed investment remain basically flat, while employment has fallen—perhaps reflecting a cannibalistic industry model and aggressive lobbying among automakers fighting each other. More damning still is the fact that domestic automakers benefited from a sizable tariff-related subsidy—the Section 232 import adjustment offset—that allowed companies assembling vehicles here to claim a credit (3.75 percent of the car’s MSRP) to offset duties paid on imported parts through 2030. Given that this credit could be larger than the duties paid on imported parts, the industry’s modest growth may owe more to this tariff exemption than to actual tariff-driven gains. The charts won’t capture this tariff credit. If included, the case for a tariff-driven automotive boom becomes even weaker.

Finally, consider the timing of the manufacturing sector’s acceleration in 2026. The effective duty rate on all manufactured imports peaked last October at 12.1 percent, and output stagnated. After the Supreme Court ruled in February against Trump’s “emergency” tariffs, the effective rate fell below 8 percent and has hovered there since. As the tariff rate fell and policy uncertainty subsided, manufacturing output surged:

Correlation is not causation, of course, and I’d wager the recent surge owes more to AI, tax reform, and Iran than to falling tariffs. Yet it remains true that the manufacturing “boom” that tariff supporters now celebrate arrived as the President’s signature tariffs—and, crucially, his power to impose them haphazardly—waned.

The typical rebuttal to these numbers would be that tariff-driven investments take time to show up in the Fed’s output and capacity measures. That’s true (and one reason I won’t claim total vindication yet), but it runs into another real-world data challenge: Future growth in manufacturing requires new factories, yet real private spending on manufacturing structures remains well below its 2024 peak. (The White House’s notes on factory-construction jobs, however, are simply incorrect.)

Tariffs are supposed to alter the return on domestic investment versus importing, prompting new investment that would appear in construction and capacity metrics. So far, those indicators do not present an optimistic tariff narrative, despite some showy (and isolated) headlines about promised factory spending.

Unlike politicians and pundits, I’m not ready to declare victory today, since it’s still too early for firm conclusions about Trump’s audacious—and ongoing—tariff experiment. But the early evidence strongly challenges the “tariff boom” storyline and is consistent with both an AI-fueled alternative and the country’s long history of protectionist stagnation and support for aging, established industries over vibrant new ones. (Consider today’s sky-high tariffs on apparel, furniture, and footwear contrasted with lower tariffs on semiconductors, aerospace, and data-center equipment.) The burden rests with tariff proponents to demonstrate otherwise.

More rigorous research will likely complicate their case further. Just this week, for instance, a new paper by four Federal Reserve economists examined the 2025 tariffs and found that—primarily due to broad exemptions for capital goods powering the data-center expansion—the AI investment boom was robust enough to keep imports and output rising, despite the tariffs that were applied (especially on consumer goods). Their counterfactual: Absent the AI investment surge, Trump’s tariffs would have reduced imports by 10 percent, GDP by 0.7 percent, and prices by rising. If tariffs were applied evenly (no carveouts), the hit to growth would be even more pronounced (-1.0 percent).

Another forthcoming study in the Journal of Supply Chain Management, “Paying More and Doing Less,” by Michigan State economist Jason W. Miller and colleagues, analyzes five Federal Reserve regional manufacturing surveys and uncovers “strong evidence that the 2025 tariffs squeezed U.S. manufacturers’ gross margins because input prices rose more than outputs.” The authors add that “[t]he 2025 tariffs also had a negative effect on U.S. manufacturers’ new orders, employment, and capital investment,” with effects that were “significantly more negative on employment and capital investment than on new orders.” In other words, the costs outweighed the benefits of the tariffs.

Both papers landed in my inbox after I began drafting this newsletter. More will likely follow. And in each, a common narrative emerges: facing a large and volatile tariff shock alongside an even larger AI-driven demand shock, American manufacturers didn’t rush to build new factories and hire en masse. Instead, they pursued strategies to mitigate tariff impacts and increased production at existing plants. Growth occurred in advanced industries aided by tariff exemptions and accompanied by higher imports, while older, politically connected sectors enjoyed hefty tariff protection yet continued to shrink—insulated from competitive pressures that might have spurred improvement. The weak link between tariffs and manufacturing growth isn’t definitive proof that tariffs caused stagnation, but it is a strong rebuttal to the claim of a tariff-fueled boom.

The best thing tariff advocates can claim today is that the chaotic and costly taxes didn’t kill the AI gold rush or negate gains from last year’s corporate tax reforms (a genuine free-market victory, by the way). But the AI-driven capital-spending wave may not endure, and U.S. manufacturers facing tariff-inflated costs across their supply chains—paired with U.S. laws that foster future uncertainty—could be reluctant to fund new factories on the bet that the AI boom will keep humming, especially given broader headwinds like an aging population and waning immigration. In that moment, protectionists may struggle to find correlates to trumpet.

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If only there existed some kind of signal …

China has shed 18 million manufacturing jobs—12 percent of its factory workforce—since 2013