The U.S. economy has proven to be more resilient than many anticipated and rebounded from the economic downturn caused by COVID-19. In 2023, United States GDP expanded to $28.3 trillion, achieving 6.6% year-over-year growth and 29% five-year growth (2019-2023). As the fourth-largest industry in the nation, manufacturing represents 10% of total GDP link opens in a new window and plays a pivotal role in the U.S. economy, driving innovation, job creation and growth. The sector has a successful record of adapting to technological advancements and global competition.

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While manufacturing growth lagged the overall U.S. economy, it still achieved strong 5.8% year-over-year and 25% five-year growth. Recovery varied across manufacturing subindustries, with HVAC experiencing a 26.7% five-year growth, whereas electronics manufacturing lagged at 15.7%.

Manufacturing Subindustry GDP

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Employment growth in manufacturing also lagged overall U.S. employment growth during the past five years. However, sub-industries like food and beverage, electronic and HVAC manufacturing outpaced the overall U.S. employment five-year growth rate.

Employment Metrics in Manufacturing Subindustries

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We will first look at four specific subindustries uniquely positioned for growth and transformation, followed by an exploration of the broader factors impacting them.

Manufacturing subindustry performance: machinery.

Machinery manufacturing matched the U.S. manufacturing five-year growth rate but outpaced it year-over-year with 14% compared to 6%. Texas, the leading state in machinery manufacturing by GDP, saw a 21% year-over-year growth, driven by companies such as Halliburton, Schlumberger and Baker Hughes in the energy, oil and gas sectors. Kansas experienced a notable 38% five-year growth, fueled by companies like Spirit AeroSystems, Cargill, John Deere and Textron Aviation in the aerospace and agricultural equipment sectors.

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Manufacturing subindustry performance: electrical.

The electrical manufacturing industry realized five-year growth of 16%, lagging overall U.S. manufacturing growth of 25%. However, states like California, Texas and Missouri matched the national five-year growth rate. Kansas has also shown significant growth with the help of a partnership with Panasonic to open a new lithium-ion battery facility, resulting in 130% five-year growth. Ohio, which experienced a 26% five-year decline, is partnering with Intel on a $28 billion semiconductor chip plant set to open in 2025.

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Manufacturing subindustry performance: food and beverage.

Over the past five years, the food processing manufacturing sector has achieved strong growth in key states. Factors contributing to this growth include good harvests and increased in-person dining. California remains the largest state by GDP in the food processing sector; however, it lagged the national food and beverage manufacturing five-year growth. Major firms in California include Foster Farms, Nestle, Dole Food Company and Del Monte Foods. Oklahoma recorded the highest five-year growth at 37%, driven by companies like Tyson Foods, Simmons Foods and Cargill.

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Manufacturing subindustry performance: HVAC.

The HVAC manufacturing industry achieved a year-over-year growth of 8.9%, surpassing the overall U.S. manufacturing growth of 5.8%. This growth is largely driven by sustainability initiatives to air conditioning and heating systems. Many states achieved five-year growth rates of 20% or higher, with Kansas achieving an impressive 94% growth, led by Johnson Controls, Daikin Applied Americas and Trane Technologies.

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Factor #1: Trends in tariffs and trade policies reshaping the industry.

Over the last several years, new federal laws and policies significantly impacted the U.S. manufacturing industry. However, in the wake of recent global economic shifts in trade policies and tariff strategies, the landscape is being reshaped once again, creating both challenges and opportunities for manufacturers. Given the dynamic nature of global trade, these frameworks are subject to rapid changes based on shifts in government policies, international agreements and geopolitical developments. Consequently, it’s more crucial than ever for businesses to proactively prepare for potential changes and uncertainties by reassessing their supply chains to identify dependencies on affected imports and explore alternative sourcing options, or domestic suppliers, to mitigate cost increases. Engaging in scenario planning can also help companies anticipate various policy outcomes and develop flexible strategies. Furthermore, staying informed about policy changes and participating in industry advocacy can provide insights and influence decisions that impact the sector.

Recently, we’ve witnessed a rise in protectionist measures, with tariffs being a prominent tool used by governments. Countries are imposing tariffs on foreign goods with the idea of safeguarding domestic industries, protecting jobs and reducing trade imbalances. While these tariffs are intended to strengthen local economies, they also introduce uncertainty and raise costs for manufacturers who depend on global supply chains.

Trade tensions around the world are leading to higher tariffs on a variety of goods, particularly electronics, automotive parts and steel. Manufacturers who rely on importing raw materials or intermediate goods may face higher production costs, forcing them to adapt by seeking alternative suppliers or reshoring production.

Companies which rely heavily on export volume may also face challenges if other countries impose retaliatory tariffs and export bans.

Factor #2: Creating a greener future: sustainability and environmental responsibility.

Manufacturing companies have increased focus on sustainability and environmental responsibility. Improving sustainability and environmental responsibility helps companies unlock financial incentives as well as enhance brand loyalty and increase market share in younger consumers. GenZ and Millennial consumers are 27% more likely than older generations to purchase from brands they believe are focused on sustainability and environmental responsibility link opens in a new window. The industry is taking two key initiatives toward improving sustainability and environmental responsibility:

1. Decarbonization: the process of reducing carbon dioxide (CO2) emissions.
2. Renewable energy usage: energy derived from sources that are naturally replenished on a human timescale. These sources include solar, wind, hydro (water), geothermal and biomass.

Decarbonization: Few subindustries have been more impacted by climate change than food and beverage manufacturing. Sustainability is now essential for the industry's longevity as rising temperatures, droughts and heat waves affect the production of crops and livestock, which serve as raw materials. For example, a dry summer in 2018 led to a 16% decrease in cereal yield per hectare in Germany. Experts predict climate change may reduce corn production by 24% and wheat production by 17% by 2030. Additionally, every 1ºC (1.8ºF) increase in global temperatures could slow cattle feedstock growth by 7%.

Leading food and beverage manufacturers are adopting decarbonization practices, including precision agriculture, agroforestry and regenerative farming. For example, Tyson Foods aims to verify sustainable beef production on over five million acres of grazing land by 2025, while General Mills plans to reduce value–chain greenhouse gas emissions by 30% by 2030 and achieve net zero emissions by 2050.

Renewable energy usage: Manufacturing and industrial users account for about a third of the world’s energy consumption and many companies are adopting renewable energy as part of its sustainability efforts. Companies are turning to solar, wind, hydro, geothermal and biomass. Electronic manufacturing companies, like Microsoft and Intel, already source 100% of their electricity from renewables, while Tesla uses solar panels and other innovative methods in its Gigafactories.

Leading machinery manufacturers are setting targets to reduce production emissions and develop equipment that runs on renewable fuels. For instance, BHP aims to cut value-chain emissions by 30% by 2030 and achieve net zero by 2050. Caterpillar Inc. offers machinery that operates on alternative fuels and is developing electric battery–powered equipment.

Factor #3: Supply chain disruptions.

The global supply chain is crucial for the manufacturing industry, ensuring efficient production and distribution. However, recent challenges such as climate change, international conflicts and unexpected events like COVID-19 have caused significant disruptions, leading to delays and shortages. Supply chain delays were the top negative consequence affecting manufacturing companies.

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Climate change has resulted in severe weather events, which disrupted production and transportation. For example, in 2021, a freeze in Texas caused an energy blackout that shut down three major semiconductor plants, causing lower production of microchip-dependent cars. International conflicts also affect supply chains, increasing costs and reducing the availability of raw materials.

The manufacturing industry is taking initiatives to reduce supply chain disruptions:

1. Diversified sourcing: A procurement and supply chain management strategy for sourcing materials, products or services from multiple suppliers rather than a single source. Diversifying suppliers provides companies increased protection against supply chain disruptions through risk mitigation, improved flexibility, cost optimization and increased innovation. As an example, in John Deere’s 2023 annual report, they announced a new approach to their supply chain strategy:
   • Multi-sourcing selected parts and materials.
   • Actively monitoring supply chain risks for potential disruptions (supplier financial viability, capacity, labor availability, quality, delivery, weather, etc.).
   • Working with the supply base to prioritize allocations to improve material availability.
   • Long-term contracts for some critical components.


2. Onshoring and nearshoring: Since the 2020s, companies have been relocating factories to domestic locations or neighboring countries to be closer to the end customer. According to the 2023 Kearney Annual Reshoring Index Report, 96% of CEOs have considered or started bringing operations back to the U.S. Morgan Stanley estimated that reshoring could add $10 trillion to the U.S. economy. A notable example is the Taiwan Semiconductor Manufacturing Company, which announced plans to build three semiconductor manufacturing plants in Arizona to produce chips close to customers like Apple and AMD.


3. Inventory management: The COVID-19 pandemic exposed supply chain vulnerabilities, halting factory production due to critical component shortages. For example, chip shortages forced GM to idle eight North American plants for several weeks in 2021. In response, companies are adopting new inventory management strategies. Previously, firms prioritized low-inventory, high-efficiency supply chains. Automakers like Toyota, Volkswagen and Tesla spent decades perfecting just-in-time systems. However, they are now shifting to stockpiling critical components such as batteries, chips and other key materials.

Factor #4: Human capital management.

Human capital management (HCM) involves practices to attract, train, manage and retain employees, emphasizing employee engagement and workforce value creation. HCM is increasingly crucial in manufacturing due to a looming labor shortage. The U.S. manufacturing industry employs approximately 13 million people (as of January 2024) and may need as many as 3.8 million more by 2033, with estimates that 1.9 million positions could remain unfilled. Since January 2020, there has been a 43% gap between job openings and hires in manufacturing. The primary reasons for this labor shortage are a technical skills gap in the current workforce and a shift in job priorities among younger workers.

Technical skills gap: The "skills gap" in manufacturing refers to the disparity between the current workforce's skills and the technical skills needed. This gap has widened due to the adoption of advanced technologies like automation, robotics and smart systems, making it hard for some companies to staff fully. According to the National Association of Manufacturers 2024 Q1 survey, 65% of respondents identified talent attraction and retention as their main challenge. The Manufacturing Institute and Deloitte predict up to 50% of skilled positions may remain unfilled.

To address the skills gap, industry leaders and educational institutions are collaborating through public-private partnerships to promote technical associate degrees and certifications. For instance, the Michigan Economic Development Corporation is offering $4.6 million in grants to eight higher education institutions in Michigan to support semiconductor education and training. Additionally, some companies are taking their own initiatives. Boeing, for example, introduced the Boeing Technical Apprenticeship Program (BTAP), a paid apprenticeship that equips participants with essential technical skills for the aerospace industry.

Shift in job priorities: By 2025, GenZ is projected to compose 7% of the workforce in OECD (Organization for Economic Co-operation and Development) countries. Furthermore, GenZ and Millennials have different priorities for job engagement and satisfaction than prior generations, such as scheduling flexibility, meaningful work and workplace relationships. Consequently, manufacturers are creating targeted strategies to improve job satisfaction in these cohorts.

Some manufacturers are experimenting with flexible schedules that let employees select shifts that suit them. GE Appliances introduced a flexible shift schedule, leading to increased new hires, employee retention and hours worked.

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Caterpillar developed marketing material highlighting construction as a mechanism to create lasting impact. “When you’re in the construction industry, you can drive past something and go ‘I helped create that.’ You see your impacts. It’s not like you’re just out there to make money, you see what you’ve helped change. You can drive past with your kids later in life and go ‘I helped make that. I built that.’”

Like the U.S. economy, the manufacturing industry has rebounded since the COVID-19 pandemic, with subindustries such as food and beverage, machinery, and HVAC outperforming the broader economy. Looking ahead, there are four key factors we believe will significantly impact the industry in the coming years and will present opportunities for companies that are agile and ready to adapt. Regulatory demands will push manufacturers to innovate and to gain access to government funding. Sustainability challenges will drive the adoption of cleaner technologies and practices. Enhancing supply chain resilience will be critical to managing disruptions and ensuring consistent production. Finally, effective workforce management will be essential to attract and retain talent in a competitive labor market. By embracing these pillars, manufacturers can position themselves for sustained growth and success.