The Manufacturing Boom: Hotter for Longer
The great American manufacturing boom keeps getting harder to deny.
Back in February, we argued in these pages that the conventional dashboard was missing the Trump manufacturing boom. Too many analysts were staring at factory payrolls and overlooking the stronger signals: production, orders, shipments, capital investment, and productivity.
In a labor market facing serious supply constraints, payroll growth is not the best indicator of sectoral health. When unemployment is low and prime-age participation is strong, aggregate payrolls across the economy cannot grow much faster than the labor force on a sustained basis. That leaves businesses competing for workers, which tends to raise wages rather than payrolls and pushes companies to make capital investments to improve the productivity of the workers they do have.
And that’s what we’re seeing. In the first quarter, nominal hourly compensation rose at a 6.1 percent annualized rate in manufacturing, and inflation-adjusted compensation rose 2.5 percent, according to the Bureau of Labor Statistics. Compared with a year ago, nominal compensation was up 5.5 percent, and real compensation rose 2.7 percent. In durable goods manufacturing, the numbers are even stronger. Nominal compensation rose 7.7 percent compared with the end of last year and 6.4 percent compared with the first quarter of 2025. Real compensation rose four percent annualized quarter-over-quarter and 3.6 percent year-over-year. Manufacturing labor productivity jumped 3.6 percent, and output climbed 3.3 percent. In durables, productivity rose 5.3 percent, and output rose 5.4 percent.
Not that payrolls have been stagnant. Durable goods payrolls climbed every month this year, including February, when the overall payroll change went negative. This turnaround in manufacturing employment after last year’s weakness is a natural consequence of rising efficiency and capital deepening. Capital investment makes labor more valuable, giving factories more incentive to bid aggressively for workers.
Around the same time we were advancing our manufacturing boom thesis, Jared Woodard of Bank of America was making a parallel argument in market-strategy language. He described the emergence of a “new industrial cycle,” one in which investors should look beyond the old secular-stagnation playbook of mega-cap tech, Treasuries, and low inflation toward something more tangible: factories, capital equipment, transport, power, commodities, and real assets.
Three months later, the case has only strengthened. BofA’s follow-up report puts it plainly: “Hotter for Longer.”
Surging Demand for U.S.-Made Durable Goods, Especially Technology
The evidence is piling up.
The latest durable goods orders report from the Department of Commerce showed that orders for core capital goods excluding defense and aircraft rose 6.7 percent in the first three months of the year compared with the year-earlier period. In March alone, they jumped 3.3 percent. Woodard points out that core capital goods orders rose to a record $83 billion in March. For the year to date, they are up 6.7 percent.
Underneath the hood, the details are even more impressive. Orders for industrial machinery are up 30 percent year to date. Orders for turbines, generators, and power transmission equipment are up 8.5 percent. Ventilation, heating, and refrigeration have climbed 15.8 percent. Computers are up 19.4 percent. Non-defense communications equipment orders are up 26.1 percent.
Corporate mentions of “weak demand” have fallen to levels implying an ISM manufacturing index above 55, a level consistent with a rapidly expanding sector, according to Bank of America. Ed Yardeni, president of Yardeni Research, recently said that it looks like the S&P 500 is headed for an 18 percent year-over-year earnings increase in the first quarter of 2026, and analysts are expecting 24 percent for the year as a whole. That kind of growth expectation is “unprecedented” outside the emergence from a recession, Yardeni added. Bank of America’s analysts agree, recently writing in a client note that we’re on track for 26 percent S&P 500 earnings growth in the first quarter, which comes down to 18 percent once you take out large one-time gains recognized by some of the tech and communications giants.
Not convinced? Let’s look at the inventory and shipments data released Thursday. In March, manufacturers’ shipments rose 1.4 percent from February and 5.5 percent from a year earlier. Manufacturers’ inventories rose as well, climbing 0.6 percent on the month and 1.3 percent from a year earlier. Factories are both shipping more and stocking more
Sales are rising faster than inventories. The manufacturing inventories-to-sales ratio fell to 1.51 in March, down from 1.52 in February and 1.57 a year earlier. That’s a very bullish signal.
There are signs that demand is outstripping supply. Yesterday we detailed the signals from the Producer Price Index of rising prices further out in the artificial intelligence supply chain. Prices for switching board and industrial control equipment for intermediate demand—that is, for businesses buying equipment to use to make products—are up 12.1 percent from a year ago. The intermediate demand prices for electrical equipment are up 27.6 percent. Computer storage devices have seen a 20.2 percent price increase. More broadly, prices for private capital equipment for manufacturing are up 5.2 percent.
But don’t take this “inflation” as a negative. In the first place, this is not consumer inflation that will force the Fed to tighten. More importantly, those are the kind of price increases that suggest booming demand and attract increased investment to produce the supply to meet that demand. The best cure for high prices is high prices and the supply growth it attracts. And we’re seeing supply rushing to catch up. Federal Reserve data show that the production of electrical equipment and appliances rose at an annual rate of 12.2 percent in the first quarter. Machinery production rose 6.3 percent. Capacity utilization in the manufacturing of computers and peripherals rose to 81.5 in the first quarter. Excluding an anomalous and short-lived spike in 2010 (which was caused by collapsing capacity even while output weakened in the wake of the financial crisis), that’s the best since before the turn of the century, during the original dot-com boom.
Expanding Margins for Capital Goods
The PPI report also gave us information on the profits being generated by all this activity. The detailed producer price report shows that trade services—which is a measure of the margins of dealers in the goods—for private capital equipment rose 3.8 percent in April and is up 12.3 percent from a year earlier. Trade services for manufacturing industries rose 0.6 percent in April and 6.8 percent year over year. Total manufacturing net-output prices rose 2.9 percent on the month and 9.1 percent from a year earlier.
These are not perfect measures of corporate profits. PPI trade services measure margins received by distributors and wholesalers, not net earnings after wages, financing, and overhead. But they are highly relevant. They suggest that the capital-equipment supply chain is not merely moving more goods. It is capturing better margins on them.
BofA’s industrial analysts see the same thing on the ground. Caterpillar has a record backlog. Power equipment is booked out into 2028 and 2029. Engineering and construction backlogs are rising. Trucking demand has moved above BofA’s growth signal, capacity is tight, spot trucking rates are up sharply, and margins are expected to improve before shipment volumes fully recover.
This is the dashboard investors should be watching: orders, shipments, inventories, output, capacity utilization, margins, backlogs, transportation rates, and profits. And the signals are extremely bullish. Manufacturers are shipping more. They are rebuilding inventories without becoming bloated. Capital-goods demand is strong. Margins in the capital-equipment channel are widening. Corporate profits are surging. And Wall Street is beginning to notice that the industrial economy is not fading.
It is heating up.
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