Trump’s tariffs — a tax on profit margins of US & foreign companies — will push in the same direction as Biden’s taxpayer-and-debt-funded incentives.
By Wolf Richter for WOLF STREET.
Investments in the construction of manufacturing plants in the US jumped to a record $21.1 billion in October, up by 4.0% from the prior month, up by 16.3% from a year ago, up by 177% from the beginning of 2022, and up by 242% since 2019, according to data from the Census Bureau today.
After decades of no-matter-what globalization, there is now a widespread rethink underway about production in the US. These facilities will all be highly automated plants that produce complex high-value products. Forget T-shirts. They’re not going to be produced in the US.
Plants for the production of semiconductors, EVs, EV batteries, electrical equipment and components, etc. are on top of the list. As we’ll see in a moment, the tens of billions of dollars promised under the CHIPS Act have still not started flowing, but Intel, the biggest recipient, is expected to receive the first $1-billion slice by the end of this month.
These amounts spent monthly on construction of manufacturing facilities do not include the costs of manufacturing equipment and installation, such as industrial robots, computers, etc. that can dwarf the construction costs of the building. Some equipment, such as HVAC systems, are included.
The total cost of a big chip plant might reach $20 billion, but the construction costs might be only small fraction of it. So the overall investment in manufacturing plants, including the equipment, installation, software, etc. is far larger. But construction spending is an indication of the pace of change.
With only November and December construction spending up in the air, we estimate that for the whole year 2024, construction spending on manufacturing plants will come in at $234 billion, up by 21% from 2023, and up by 186% from 2021.
In the seven years between 2015 and 2021, factory construction spending had flatlined at about $80 billion per year.
The Big Rethink.
Biden’s debt-and-taxpayer-funded incentives were among the drivers behind this construction boom. Every dollar spent on those incentives gets added to the recklessly ballooning US national debt and to the burden of that debt.
Those incentives may not continue under Trump, such as the EV tax rebates, according to current sound bites. But a lot of the spending falls into red states, such as massively expensive chip plants in Texas and Arizona, and Republican Representatives are not going to be overly enthusiastic about reducing the bacon their constituents expected them to bring home.
Trump’s company-funded tariffs will also promote investment in manufacturing facilities in the US, but the motivation is different. Companies would want to dodge the tariffs that are a tax on their profit margins, and they can dodge them by producing in the US, which would also allow them to dodge transportation costs, loss of IP, and other risks.
Companies cannot automatically pass on the tariffs; they’re already charging the maximum price they can without losing sales. Price increases will hurt those sales. Buyers can just buy something else or not buy anything. For example, imported vehicles would fall by the wayside as buyers shift to US-produced vehicles. All major foreign automakers are already producing vehicles in the US.
Price increases will further push down unit sales, a lesson that automakers have been relearning in 2023 and 2024. Consumers have other options and hate, hate, hate price increases. So the way to dodge Trump’s tariffs on imported motor vehicles and components is to produce in the US.
The rethink about risks & costs of globalization and China-dependence is another big factor. The increasingly complicated and stressed relationship between the US and China has exposed the scary dependence by US companies on production in China as a fundamental risk, not only for the companies, but also for national security.
The production and supply-chain chaos during the pandemic made clear to US companies and policy makers just how scarily dependent the US had grown on China, and that China could shut down part of the US economy, generating enormously disruptive shortages in the US. That caused a strategic rethink.
T-shirts may never be made in the US, and no one cares, but semiconductors will. This has been one of the big changes coming out of the pandemic.
Trump was the first president who had the gumption to be a China hawk, against a revolt by Corporate America and entrenched globalization-mongering economists and media. But Biden more or less followed in his footsteps. And the next Trump administration looks like it will move further into that direction. All of which translates into increased production in the US.
But it takes years from deciding to build a huge complex automated factory to actually being able to ramp up production in that factory. These are long-term moves, they don’t happen overnight or month-to-month.
Factories become a bigger part of overall construction spending.
Manufacturing plants’ share of total construction spending has about doubled since 2019. In October, factory construction spending accounted for 11.1% of total construction spending. In October 2019, it had accounted for 5.5% of total construction spending.
For the past 12 months through October, factory construction accounted for 10.7% of total construction spending, up from 5.8% for the 12-month total through October 2019. This ratio cancels out the impact of construction cost inflation.
The first money of the CHIPS Act starts flowing in December.
The CHIPS Act, signed into law in August 2022, led to slew of announcements by chipmakers and by the government proudly touting massive giveaways – grants and tax credits that will never have to be paid back, and loans that will have to be paid back. Intel was the biggest beneficiary with up to $23 billion in grants and loans and up to $25 billion in tax credits.
But no money changed hands at the time, and still hasn’t changed hands. Due diligence had to be done, and construction milestones had to be met, etc. But in December, the first dollars will start flowing.
Last week, Intel and the government announced that they were finalizing a $7.9 billion portion of the package. The government said that Intel will receive at least $1 billion before the end of December, which would be the first $1 billion of the CHIPS Act to be actually handed out.
Industrial robots cost the same anywhere.
Expanding manufacturing in the US is based on the principle that industrial robots cost the same in the US as in China, or anywhere, that manual labor is a much smaller cost component in modern automated manufacturing, and that transportation costs (which spiked during the pandemic), the loss of Intellectual Property (IP), which is a given in China, and other risks and costs have to be added to cost equation.
It’s all focused on complicated key high-value products, such as motor vehicles and components, semiconductors, batteries, electrical and electronic equipment, heavy components and equipment, etc. This isn’t about manufacturing low-value products in sweatshop settings, such as T-shirts.
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Thanks Wolf. 7.9 billion for Intel seems like a small amount relative to the increase since 2021. In my next of the woods I can tell you that over the last five years many pharmaceutical manufacturing has moved in, along with EV related production. It will be interesting to know 1) who are the manufacturers behind these numbers and 2) who will still be in business in 5-10 years…
Manufacturing requires real inputs and energy. It also requires customers that can afford to purchase the manufactured product, but with so many zombie companies being kept alive these days, maybe this is all “old school” thinking and as irrelevant as the strategy of selling companies with a P:E ratio greater than 20…
Interesting times.
The customers and demand are right in front of your eyes: US consumers and companies. It’s just that these goods have been supplied from manufacturers overseas. If they’re produced in the US, those goods will come from US producers, and the overseas manufactures are out of cheap luck, as are shipping and freight companies, ports, etc.
Manufacturing in the US doesn’t shift demand and doesn’t need new demand. It just shifts where the supply is coming from. That’s all. And this shift of supply hugely beneficial to the US economy.
Wolf, as you have pointed out the demand will not change but the supply capacity will double (US and China). Higher supply by equal demand ends up in lower prices. China needs to find new customer. Where? In the Bricks? May this generate growth globally?
How you will see the world changing?
Some Chinese manufacturers are going to go out of business because they lost their US customers? So what? They did that to the US manufactures for decades.
Replying to you and Wolf:
Yes, so what. China can either start consuming their own production or just close the factories and migrate back to the rural villages to farm by hand. Not our problem.
The US, Mexico, and Canada can be an essentially self-sufficient energy/farming/manufacturing/consumer economy with very few imports from beyond. Automated auto, aircraft and electronics companies in the US and maybe the world’s most advanced T-shirt company somewhere in Mexico. Maybe a few million factory jobs there to absorb the local working population and ease the economic migration North? After three decades I’m personally really tired of seeing everything “Made in China” and at the same time our national debt, consumer debt, and immigration problems just get worse. Nafta can be rethought and updated and our combined ~500 million population can take care of ourselves and let ~1.4B China take care of itself.
“Manufacturing requires real inputs and energy.”
Cheap natty gas will be a big tailwind for the US mfgring industry.
Yes. I read DataCenters most likely will just build their own nat gas power plants next to the Datacenter and not worry about the grid.
I would not be surprised if manufacturing plants do this too.
I guess this is good news?… At least it’s better than a grant to fund underwater lepidoptera studies.
I have doubts that much of this will be successfully executed but it drives growth regardless. Looks like we are rewarding companies who originally outsourced and are bringing it back. That said, they run the government informally so not unexpected
Just more corporate welfare,
If jobs are returning to the States, then that’s good for Americans.
I’m not sure what the Canadian economy will do because one loonie is about 70.5 cents USD right now.
RBC predicts that the Bank of Canada will cut rates by 50 basis points while the U.S. economy will be booming.
And rent prices are still putting up a fight not to go lower.
All economic indicators are showing growth and more growth. All Inflation forecasts and last few months data show we are going up in Inflation. but FED governors are acting like dont matter.
Today Waller speech is good example. If he needs data, he should state that fact. Preemptive statements like I lean towards Rate Cut in December meeting is just irresponsible. Those guys are just gaslighting the Markets to go new High levels.
Waller was pretty clear that he is on the fence. With the data so far he is “leaning” toward support of a rate cut. But if the coming data until the meeting — he mentioned some of the data … JOLTS, jobs report, CPI, etc. — is hot, he might lean toward pause.
fine, but why run his mouth in the first place?
why does the fed not see it as their mandate to contain the insane animal spirits that they, and they alone, created?
Good debt v bad debt. Building these factories will be hugely beneficial to the US in the future. Much better than a sugar hit from a cheque in the mail.
Boom times in America!
I don’t think you’re making much sense in terms of the relationship between tariffs and consumer prices though. Yes raising prices would lose customers, but lowering prices further would gain customers. So why don’t companies do that? Because they then wouldn’t be making as much money per customer. If their costs go up due to tariffs the money they need to make per customer goes up, and the price point that makes sense for them to charge goes up.
You are assuming profit margins are fixed, and they are not. Nobody is entitled to profit, especially record profits.
Yeah, if everybody gets product type X from China, then consumers can’t just buy someone else’s version of X. Prices might not go up the full percentage of the tariff, but they’re going to go up.
Quite Likely,
you need to start reading some of the articles here. So click on the links below (blue text).
1. “Yes raising prices would lose customers, but lowering prices further would gain customers. So why don’t companies do that?”
Yes, they do that. And on a large scale. They’re cutting prices just fine. See automakers in 2023 and 2024, when they used incentives to cut prices. Tesla cut prices outright. Now legacy automakers are cutting MSRPs. The MSRP of the 2025 model year Ford F-150 for example got cut by $2,025 from the 2024 MSRP. Walmart cut prices on many thousands of items in 2024. Prices of goods have gotten slashed in lots of places, from laptops to washing machines. As a whole, the durable goods CPI has dropped in a historic manner for the past two years. No one is going to raise prices of these goods because of tariffs, or they’ll be dead in the water.
2. tariffs are placed on the COST to the importer, not retail price. A T-shirt that sells for $9.99 at Walmart costs Walmart $1 in Bangladesh. A 60% tariff raises the cost to Walmart by $0.60. It can still sell the T-shirt for $9.99 and make plenty of money on it. If it tries to get $10.50 for that T-shirt, its sales might plunge. People hate, hate, hate price increases, and Walmart figured it out and cut prices and had some big sales increases in recent quarters!
The wage end is missing in all of these arguments. Durng the 100 years when we MADE THINGS HERE, including T-shirts, workers were PAID more, so they could pay higher prices. Wall Street fooled us into thinking that low price is the only thing that matters, so they could move all the production elsewhere and stop paying Americans.
I wouldn’t assume that we can’t make clothing. When companies are forced to sober up from their 40-year China binge, they will find ways to make everything here.
Companies that have spent billions on stock buybacks are now being subsidized by the taxpayer. Got it!
Igzactly, that’s why Trump’s tariffs – a tax on corporate profit margins – is a much better solution than subsidizing huge US companies with billions of taxpayer dollars to get them to build manufacturing plants here. Tariffs accomplish the same thing if they’re high enough, motivating companies to set up production in the US.
And in cases where companies refuse to shift production to the US, they’ll just have to pay the profit margin tax. Passing on the cost of the tariffs will be hard to do, with durable goods prices falling. If a company raises prices on cars or other goods, sales are going to fall because consumers hate, hate, hate price increases and they have had it, and companies have had to CUT prices to maintain or grow sales – see the automakers, Walmart, and others.
Sounds like a plausible idea, like the Laffer curve.
Interesting thought about the price of cars. All I can tell you is the price of my new 2024 Subaru Outback(same model) has gone up about $3500 dollars since my last new one which was in 2017. that sounds like price inflation to me. Granted that was seven years but your reply makes it sound like there was none.
Textile mills were all over the eastern US in the early 1900’s. We can make threads and clothes.
On-shoring is important from a defense perspective. It is a matter of sovereignty. It is stupid to have an enemy like China making so many of our items, especially pharmaceuticals. We are one of the few countries who can be self-sufficient, who have sufficient resources to tell every other country to drop dead. Someone asked me how much money I needed to have. I said just enough to tell everybody to go to hell. Compliments to Bogart. The US has more than enough money and resources to do the same.
U.S. is lacking workers / what are you talking about.
1. The US is not lacking industrial robots, and these plants won’t be employing low-level workers for routine jobs, they’ll be employing highly qualified people, including lots of engineers. Manufacturing in the US isn’t what it used to be.
2. The US is not lacking workers either. But for certain skill sets, qualified workers don’t grow on trees, and they will have to be trained, which is exactly what successful manufacturing countries are doing all the time.
US States also are training workers for the new type of manufacturing Wolf:
When the HUGE new stainless steel processing facility was well underway in southern Alabama 15 years ago, I was very impressed to see that state put several millions into building a state of the art training facility nearby to prepare workers for the higher tech, higher performance and HIGHER PAY jobs needed.
Other states are jumping on the band wagon these days, increasing both the classrooms and OJT efforts to prepare young folks for the vastly different level of skills needed NOW.
If the US was completely self sufficient (which is possible, I’m not arguing that) what would happen to the rest of the world? Globalization was a way (originally) to encourage countries toward capitalism and democracy. The alternative was communism.
It worked until it didn’t…
I don’t really care about the rest of the world. The rest of the world can learn to stand on its own two feet, as best it can. China and Russia have sufficient resources to survive without us. Europe will have to keep kissing US, China, and Russian butt. Third world countries main contributions to the first world are terrorism and illegal immigration. I suppose a few have some metals we could use.
BTW, globalization is a way to put more money in the hands of the global elite, as if it had any other goal.
Trump’s mercantilism will ensure that BRICSplus will grow and thrive. The lineup around the block to join will only grow.
The US can be self-sufficient but at very high cost. 150 years of industrialization has left the continent depleted of high- quality minerals. We still have iron, copper, etc…, but not in the thick veins of yore. So American minerals are much more expensive to produce. And rare earths are plentiful but environmentally devastating. The Chinese are fine with that, Americans not so much.
Can’t exactly tell the rest of the world to go to hell with the dollar as reserve currency…
Manufacturing remains a source of national pride wherever you go. There isn’t a single country in the world that wants to remain a “services economy” in every aspect. The Chinese have taken manufacturing and traded breathable air for it. For them, it’s worth the trade. You can clean up later and have a good environment when you’re rich.
cleaning up your groundwater table is something they’ll do for centuries. Extinguished species wont come back either.
I think you vastly underestimate the clean up costs.
I guess just declare a superfund site and move on. No wonder Trump shutdown the TOXMAP where people had easy access to pollution area and type.
Can you say “Higher for longer?” Wolf has been sharing data about this for a while but this is the icing on the cake. It will be interesting to see how US on-shore factories with less labor (as a cost factor) fair in the next few years. The dollar is already strong and this data will support that further (interest rates higher for longer) while the pull to import tee-shirts and other low tech items gets even stronger. I think the biggest unknown will be the lag between factories being built today and the time for them to come up to full manufacturing capacity. It’s hopefully a bad comparison but when you see lots of new hotels being built, you can bet a recession is around the corner.
Hopefully at least 1 US EV battery company will avoid Northvolt’s fate. In the West, it’s easy to think “If China can do it, it’ll be easy for us!” but we’re behind them in some things.
There are already several big battery plants in the US, including Tesla’s Gigafactory in Nevada, that are doing just fine.
Not to mention that Stellantis just got $7.5 billion in federal funds today to build more on the same day that its CEO resigned.
Musk’s support for Trump is paying dividends as far as keeping Chinese competition for batteries and EVs out of America. I’m sure he will be an advocate of a more tempered approach on Chinese goods tariffs outside of EVs and their batteries as he has his Chinese operations to remain intact as it is a large portion of his wealth. It will be doubtfull that he can influence Trump and his national security team to go lightly on china. Musk could very well be a big loser.
Good point, how did I forget Tesla? More of a Europe problem, then.
The US has only 4% of the world’s population which consuming more than 25% of the world’s resources and the rest of the world is saying enough is enough and let’s get back to something resembling equitable.
I support more domestic manufacturing – but I sure hope my “made in USA” Honda parts continue to use metric nuts & bolts. I don’t want to buy another socket set…
I’d be concerned about the quality of “made in America “ as well. We’re not exactly world renowned for our exacting tolerances on complex mechanical machinery. For example, consider a Subaru made in state of Indiana. I suspect the engine and transmission are both made in Japan, and then installed in Indiana. A tariff on those very expensive components is likely to have a noticeable impact on the overall cost of the car. Making those components in the USA to avoid the tariff could adversely impact quality, potentially reducing the reliability of the car.
Subaru is a small automaker with only one plant outside Japan, the one in Indiana, and only two plants in Japan. Not a great example.
But look at Honda. It has been making engines in the US since 1985 and transmissions since 1989. And it has been exporting Hondas from the US to other countries since 1987. Hondas are not considered to be low-quality vehicles.
Hondas have the most US content behind Teslas. I would worry more about the foreign-made Fords and GMs.
A lot of the affermarket parts I’ve been getting are made domestically too. My new ProgressTech rear swaybar says Made in USA on it. Ditto my exhaust.
I don’t think any part of this this car was actually made in Japan, come to think of it…
Construction costs are paid for with debt, cash flow, working capital, grants, tax relief. Any guesses on allocations?
In terms of the semiconductor plants, of the money that has been spent so far, 0% is from government subsidies. The first billion will be paid this month. Some of these companies are very cash-rich, and fund factory construction from cash flow and cash on hand.
Among the automakers, Tesla has funded the construction of its entire Texas empire from operating cash flow and from cash on hand (it has over $30 billion in cash and growing).
Global gross manufacturing output by China is nearly triple vs. the USA, I don’t think America is much of a factor.
BS on all counts. China’s manufacturing output (less than $5 trillion) is less than double the US output (over $2.5 trillion), not “nearly triple” (2023). The US is #2, No country is even close to the US. US output is more than double that of #3 Japan and nearly triple that of #4 Germany. In fact, US manufacturing output is almost as big as the next three combined (Japan, Germany, India).
The US is a huge manufacturer, but the problem is that it’s not huge enough, and that it has become dependent on China.
I’m warming to the tariff talk, because it truly is a consumption tax. Like tollways, you use it you pay the tax!
I prefer a little more nuance. Like you, tolls on major roads are fine, but I’d hate one to enter and leave my neighborhood everyday. Balance is important. And there will be negative reactions from foreign countries which will harm existing US exporters to some extent. Some US manufacturers are moving some production abroad in anticipation. Harley-Davidson is an example. I hate using a hammer to pound in a screw.
Your comment about Harley is BS. HD moved a lot of production abroad years ago because it’s a dying brand in the US, in a shrinking market, but doing better overseas. HD has been manufacturing in Brazil since 1998, and in Thailand since 2017 (and I covered that move at the time). US sales were already plunging back then.
In the US, its sales collapsed by 41% in 10 years, to just 98,468 in 2023, from 167,800 in 2013. And 2024 is going to be even worse.
For this same reason, I’ve been warming up to the idea of sales tax, despite living in a state without one.
I read an article once that said only the Federal government should have an income tax, State governments should rely on sales taxes, and local government should control property taxes. Because they are the most locally accountable. Add in a few federal tariffs and state/local fees and you’re good. I think 20-25 States already have zero income tax and more are moving that way.
Then you have California or NYC with layers upon layers of income and sales taxes..
Companies will pass on as much of the tariffs to consumers as is profitable for them, depending on the price elasticity of demand. Very little will be passed on for elastic goods and much more for inelastic goods. Passing on the tariffs will reduce sales and production but that may be the best move for a company if absorbing the tariffs will make certain marginal sales unprofitable.
Tariffs are a means to an end. They aren’t meant to necessarily be permanent. I think there is some merit to using them and I’m glad they will be used to work better trade deals in the future.
In Just twelve months LBJ introduced a whole spectrum of “Act”s : the voting right Act, the immigration and nationality Act, the war on poverty Act, the Vietnam Act, the discrimination in housing Act, the man on the moon Act and the hwy safety Act …expanding his govand gov debt.
Between 1960 and 1965 GDP was up by a third. Income was 40% up.
Corp profit were high and unemployment was low and the stock market roared. During the Great Society the gov couldn’t stop spending. LBJ was preaching quality of life vs greed, profit and quantities. The rancor between Ralph Nader vs Frederic Donner GM ceo was visceral.
what point are you trying to make here?
Lot of thinly veiled politics showing in this thread. I’m excited to see what America can do when the heat is on.
We don’t need more cheap junk and we could stand to improve our agricultural practices.
A lot of this bickering is opining the fate of super size me America.