American manufacturing is seeing a slight boost this year, and protectionists are rushing to claim victory. However, a careful analysis reveals that the bounce is fueled by a mix of the AI boom, tax cuts, deregulation, and a potential end in sight to tariffs. It is also clear that the tariffs have limited what could have been a far larger manufacturing surge.
Manufacturers are optimistic and expanding. The Institute for Supply Management’s manufacturing index reached 55.6 in July, the highest reading since May 2022 and the seventh consecutive month of expansion after ten months of contraction. Even the employment component of the survey crossed into expansion territory for the first time in almost three years, with the manufacturing sector adding roughly 30,000 jobs so far this year.
While this is good news, it’s also important not to overhype the growth. Overall industrial output has risen about 2.3 percent so far this year and remains below pre-COVID levels, even as overall economic output has grown roughly 15 percent since then. Moreover, this bounce in manufacturing output is largely explained by a rise in industrial capacity utilization rather than by an expansion in manufacturing capacity.
This bounce also coincides with the Supreme Court striking down the IEEPA worldwide tariffs. Manufacturing output also bounced after Trump was elected in 2024 and before the IEEPA tariffs were imposed. During this period, anticipation of deregulation and tax cuts under a second Trump term fueled the increase in industrial utilization and output. However, that upward swing abruptly flattened and then reversed course after the tariffs took effect.
Industrial production surged two percent from before the 2024 election until the first tariffs were imposed in 2025 and then declined about 0.4 percent through the IEEPA tariff period before the Supreme Court struck down those tariffs. The current 2.3 percent boost in output has come after the IEEPA tariffs were struck down and markets began to anticipate an eventual end to the current tariff regime.
For many, this can seem counterintuitive. Tariffs were sold as a way to support a manufacturing renaissance in America. But this simplistic campaign rhetoric ignores a crucial point about America’s trade: roughly half of our imported goods feed our supply chains and American industry. In 2025, 52 percent of imported goods were industrial supplies – which includes aluminum used to build airplanes and silicon wafers that become computer chips – and capital goods, which are the goods used to produce other goods and services – such as a blast furnace in a new steel mill.
Broad-based tariffs, such as the ones imposed in 2025, tax American businesses as they buy the materials needed to expand our own manufacturing and business base. In fact, inflation-adjusted imports of industrial supplies and capital goods rose by 20 percent after the IEEPA tariffs were struck down. As surprising as this might seem to a protectionist, it is exactly what economists expect: tariffs increased the cost of building and operating factories in America, and a potential end in sight to tariffs has helped spur a manufacturing boost.
This relationship isn’t new. Some of the largest boosts in American manufacturing output have been directly tied to trade expansion. Over the 17 years from the Fall of the Soviet Union until just before the 2008 Great Recession – a span that includes the implementation of NAFTA – U.S. industrial output rose by 83 percent, more than twice the growth rate of the preceding 17 years. Here again we see the integral relationship between imports and growing our own manufacturing base: from 1991 until 2008, inflation-adjusted imports of capital goods and industrial supplies increased by roughly 250 percent.
The use of imports to feed our industrial base is foundational to America. The U.S. ran near-consistent trade deficits in manufactured goods until the 1890s, as we imported machinery and steel to build the greatest industrial and logistical empire on the globe. So, it is little wonder that industrial output stalled under the tsunami of tariffs in 2025 and began to grow again once the specter of tariffs had been partially lifted.
The current manufacturing boost is also being aided by the pro-growth reforms in the One Big Beautiful Bill. The bill implemented full and immediate expensing for factory construction, finally removing the double taxation of investments in building factories that has been a feature of the U.S. tax code since the beginning. Unfortunately, this is a temporary provision, but for now, it is helping to facilitate some expansion. Further, the bill implemented limited deregulation and permitting reform that can help speed up permits and support industries that would not be able to expand without such reform.
However, another story lurks beneath the aggregates. The manufacturing bounce hasn’t been even or across the board; it has been dominated by industries pivotal to the AI boom. AI has the power to improve all areas of human endeavor. AI is a condensed, adaptable form of humanity’s collected knowledge that we can apply to the smallest and largest problems we face. AI may do for knowledge what railroads did for transportation.
So, despite tariff headwinds and interest rates spiking due to the federal debt that now stands near $300,000 per American household, the AI revolution continues because of the promise it holds. Indeed, when we look under the hood of the Fed’s industrial production index, so far this year, the index for just Computers, Communications Equipment, and Semiconductors is up 10.6 percent whereas the overall index excluding these industries is up only 2 percent – more than 5 times the rate of other manufacturing industries in the U.S.
Tragically, but unsurprisingly, car and truck production in the U.S. has fallen by roughly five percent since the Liberation Day tariffs were imposed. The auto industry is heavily reliant on our trade with Mexico and Canada, and the average component in American-made cars will cross those borders several times before the car is fully assembled – potentially facing tariff barriers each time.
The ISM survey commentary contains some startling examples of how tariffs interfere with these delicate supply chains. In the same July report that produced a four-year high, 62 percent of respondent comments were negative. The prices index stood at 71.1, marking the twenty-second consecutive month of rising input costs, and ISM attributed it to three things: steel and aluminum price increases, tariffs on imported goods, and petroleum costs. Five of the six largest manufacturing industries reported price increases.
General Motors paid $3.1 billion in tariff costs in 2025. Toyota’s net income fell 25 percent over nine months, with roughly $8 billion in tariff costs, and the company has said publicly that the burden cannot be sustained. Industry-wide costs have run past $35 billion while Kelley Blue Book put the resulting increase in average vehicle price at 10.4 percent in 2025.
We’re left with what was always expected: tax cuts and reform paired with deregulation and permit streamlining, mixed with the AI revolution, are pushing manufacturing upward, while tariffs and threats of more government involvement in industry are holding back growth and delaying investments. This is another example of a timeless truth: prosperity comes where government is limited.
If we want to turn this current manufacturing bounce into a sustained boom, we’ll need to get rid of the tariffs, make the new factory expensing provision in the tax code permanent, continue to streamline permitting and deregulate, and, ultimately, continue to get government out of the way.
Richard Stern is Vice President of the Plymouth Institute for Free Enterprise at Advancing American Freedom.
