Jefferson: Response to Tariffs Has Been Muted

The U.S. manufacturing sector's response to the 2022 tariff regime has defied expectations, revealing a muted but resilient trajectory that investors may be underestimating. While tariffs have introduced significant headwinds-ranging from supply chain disruptions to inflationary pressures-the sector's ability to adapt through reshoring, automation, and strategic sector pivots suggests a more nuanced story of endurance.

Tariff-Driven Volatility and Sectoral Resilience

According to a report by Manufacturing Today, U.S. manufacturing output rebounded in early 2025 after over two years of contraction, with the Institute for Supply Management (ISM) reporting a manufacturing PMI of 50.9 in January 2025. This marked a critical turning point: the Eide Bailly report shows the rebound was driven by surging demand in defense, automotive, and technology sectors (Eide Bailly report). Statista's data indicates output grew by 5.1% quarter-on-quarter in Q1 2025 (Statista's data), a stark contrast to the prolonged downturn. However, this recovery was shadowed by the 10% general tariff on imports and 25% tariff on motor vehicles, which spiked input costs and forced manufacturers to stockpile raw materials like steel and semiconductors, as a Bloomberg report details (Bloomberg report).

Despite these challenges, reshoring efforts have gained momentum. As of Q3 2025, 69% of manufacturers reported bringing segments of their supply chains back to the U.S., driven by trade policies and domestic incentives, the Eide Bailly report also finds. This shift, while costly, has reduced reliance on foreign suppliers and bolstered domestic capacity. For instance, the automotive sector has leveraged nearshoring to mitigate exposure to Chinese-sourced components, even as tariffs pushed effective rates to 17.9% in the short run-the highest since 1934, according to a Budget Lab analysis (Budget Lab analysis).

Mixed Signals in Q3 2025: Contraction Amid Strategic Investment

The latest data from September 2025 paints a mixed picture. Bloomberg reports the ISM Manufacturing PMI fell to 49.1%, signaling a seventh consecutive month of contraction. Yet, this decline was partially offset by growth in five industries, including petroleum, primary metals, and fabricated metal products, the Eide Bailly report notes. Meanwhile, the S&P Global US Manufacturing PMI eased to 52 in September, down from 53 in August, indicating a slowdown but still reflecting four months of expansion, per the Budget Lab analysis.

The sector's resilience is further underscored by strategic investments in automation and digital transformation. As a YCharts report observes (YCharts report), firms are prioritizing domestic capacity expansion to counter labor shortages and global supply chain disruptions. These efforts, though capital-intensive, are positioning manufacturers to weather long-term uncertainties.

Underestimated Resilience: A Case for Reassessment

The muted response to tariffs belies the sector's adaptability. While rising costs and policy uncertainty persist-evidenced by a 0.3 percentage point increase in the unemployment rate by year-end, according to the Budget Lab analysis-manufacturers have demonstrated a capacity to innovate. For example, the defense and technology sectors have capitalized on domestic demand, with new orders and employment metrics rebounding in 2025, as the Eide Bailly report documents.

Investors should also consider the broader economic context. The Federal Reserve's balancing act between inflation control and growth will likely favor sectors that align with reshoring and automation trends, the Eide Bailly analysis suggests. Moreover, the contraction in non-manufacturing sectors like construction (down 3.5% in Q3 2025 per the Budget Lab analysis) highlights the relative strength of manufacturing as a growth anchor.

Conclusion: A Long-Term Play on Resilience

The U.S. manufacturing sector's response to tariffs has been neither catastrophic nor uniformly positive. Instead, it reflects a complex interplay of short-term pain and long-term adaptation. For investors, this underscores the importance of looking beyond headline metrics-such as the ISM's contractionary PMI-to assess the sector's structural strengths. As manufacturers continue to reorganize supply chains and invest in efficiency, the muted response to tariffs may signal a durable, if uneven, path to resilience.