Driven by the pro-growth and pro-manufacturing policies that are expected to materialize in 2025, there is a refreshing sense of optimism and enthusiasm for the new year permeating the manufacturing industry, particularly among job shops. While a number of projects were put on hold last year, many are now back in production plans for 2025.
In addition to favorable policies, a large number of OEMs are increasingly reshoring work back to the U.S. because of supply chain disruptions that culminated during the COVID-19 pandemic. Those disruptions, coupled with ongoing global tensions, compound the risks and vulnerability involved with offshore manufacturing. Direct foreign investment in the U.S. manufacturing sector will also continue to be strong in 2025, contributing to onshore productivity.
In 2024, concerns over the potential elimination of the 2017 tax cuts, a lowering and possible elimination of the accelerated depreciation rate and high interest rates caused shops to pump the brakes on capital investment. Those three factors amount to huge chunks of lost cash flow, especially for small mom-and-pop shops.
Many job shops are family-owned enterprises structured as limited liability companies (LLCs). They are taxed as an ordinary individual’s income. An increased tax burden for upper income individuals would impact these shops as well, shifting them into higher tax brackets and eliminating their ability to invest in new capital. Absent a tax carve out, all family-owned shops are impacted. With the incoming administration, many experts believe the 2017 tax cuts will remain in place and become permanent.
Additionally, there was concern surrounding “bonus depreciation”—additional first-year depreciation allowed by the Internal Revenue Service on qualifying business property beyond normal appreciation allowances. Bonus depreciation decreased to 80% in 2023 from 100% in 2017 and was reduced in 2024 to 60%. Though the allowance is scheduled to decrease yearly to 0% in 2027, some feel the rate may return to 100% in 2025.
Financing issues added to capital expansion concerns in 2024. Interest rates remained high for most of the year and banks required personal loan guarantees, meaning shop owners had to secure loans with personal assets such as vehicles and houses. For this reason, many shops curbed their spending. Fortunately, interest rates have started to fall and likely will continue to do so in 2025.
Favorable policies will fuel upswings in several industry sectors, including oil & gas, mining, construction/infrastructure and agriculture. Commercial aircraft and defense spending will also remain robust, as will the medical and semiconductor industries.
The automotive industry will one to watch in 2025 as OEMs remain uncertain as to whether to pursue all electric, hybrid or internal-combustion-engine type vehicles. Many auto companies that invested billions of dollars in EVs have either stopped or pulled back because the market isn’t buying.
Along with growth will come challenges. Skilled labor in manufacturing is going to remain a problem well into the next decade, with demographics as a key reason. As older employees retire, they take their tribal knowledge with them. Further, manufacturers will be competing to attract workers from a smaller talent pool than those of previous generations. These factors will continue to drive the need for investment in automation and the use of digital manufacturing to improve quality, output and effective use of existing assets.
To further combat the shortage of skilled labor, shops will continue to establish strong community relations through open houses for young individuals and their parents, partnering with local community colleges and vocational technical schools and establishing co-ops. As a result, interest in manufacturing jobs is expected to grow somewhat among younger workers.
In addition to a skilled labor shortage, the combined costs of existing labor and raw materials has continued to rise, on average, at least 30% over the past few years. Unfortunately, shops are unable to pass these costs onto customers and will turn to automation and advanced CNC machine tools as solutions.
Along with automation and advanced machines, artificial intelligence will be a game changer over the next five years. It will make smart machines and systems even smarter, eventually giving manufacturers the ability to seamlessly go from a 3D model to an optimum part program.
U.S. manufacturing is a cornerstone of the national economy, and it’s an industry sector that is constantly evolving, integrating new technologies, improving efficiency and adapting to shifting consumer demands and market dynamics. While this country’s manufacturers will continue to face challenges, they look to 2025 as a year of growth and opportunity fueled by policies that favor the industry.
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