The Productive State

Looking ahead to the next political cycle, a consensus left agenda is clearly forming around two sets of goals. One set for the American economy – stability, growth, innovation – and another for the American people: affordability, equality, better work, and a sense of shared control over our economic future.

Each of these consensus goals points to a pervasive dissatisfaction with the supply side of the economy, where private capital determines what goods and services are produced, who can afford them, and even what kinds of jobs exist. Today, that supply side is organized mainly to produce profits, with no view to the unaffordability, stagnation, inequality, and volatility that the single-minded pursuit of profit creates for all.

To produce a better life for all, policymakers will need to govern the supply side. Doing so will require tools more powerful than the tax breaks, tighter regulations, and targeted subsidies that policymakers have so far relied on. It will require a real restructuring of the supply side based on a better map of our economy — a map of its real productive capabilities and its global dependencies. Any plan for achieving the next progressive economic agenda must be able to answer two questions:

• How is the economy we want to build structured?

• What policy tools will be needed to build that structure?

At Forces of Production, our mission since first setting off has been to chart the waves of the supply-side economy while tracking the currents beneath. Today, our goal is to show a route across the economic seas to a more democratic, dynamic, and decarbonized economy. Today, we share the first design plans for a policy vessel we think is capable of making the journey: the Productive State.

The Productive State approach brings the state to the supply side, where it can govern the economy using the economic powers of public ownership to directly plan, coordinate, invest, produce, and provide.

For decades, corporations have used these same tools privately to build an economy that only guarantees profits can be extracted instead of guaranteeing the public interest is served. The Productive State uses them to restructure key sectors and supply chains towards our shared goals in ways that taxes, transfers, and tinkering at the margins of the private market simply cannot.

The Productive State shapes the supply side by redesigning key sectors and structures of the macro economy around our collective goals. By participating directly in the supply side as a core actor, the Productive State can publicly provide the essential goods and services of a dignified life, most importantly energy and healthcare.

The Supply Side and the Productive State

Since the New Deal, American political economy has operated on a division of labor between the state and market which has given the private market control of the supply side and made the state responsible for the demand side. That demand-side responsibility is critical — fiscal spending to fight recessions, welfare to sustain households, and unemployment insurance to support jobhunters — but limited. Once private capital and market exchange have produced real world outcomes on the supply side, the state taxes a share and redistributes it in various forms. While this demand-side smoothing is a lifeline for many, it cannot change how those sectors are organized, who profits from them, or what their products cost.

The supply side is where most important long-term decisions about the economy are made.

By “supply side”, we mean the structure of production itself: the local and global network of equipment, workers, and organizations that coordinate to produce the goods and services purchased by consumers on the demand side. These are shaped by patterns of investment and divestment in productive capacity and infrastructure. This network is disaggregated into sectors, industries, and institutions that all shape the structure and capabilities of the entire economy through the unique roles they each play, and the unique technical dynamics at play in each sector.

The supply side is a mammoth apparatus. It encompasses the grid that powers homes and businesses, the healthcare system that treats patients and employs a tremendous amount of the US workforce, the housing stock that people live in, the manufacturing base that produces essential goods, and every point that coordinates trade with the global economy. Across all this activity, private capital remain the primary decisionmakers, which in turn has meant that investment, production, and provision remain fundamentally organized around the goal of private profit.

The demand side is where decisions about the present, rather than the future, are made.

What to have for dinner, which kind of car to buy, whether to go on vacation — these demand-side decisions connect the supply side to household consumption. On the micro level, the state is responsible for ensuring that everyone has sufficient purchasing power to demand the basics of a dignified life. On the macro level, the state is tasked with managing the demand side of the private market through fiscal and monetary policy to prevent recession and keep the private economy growing even when investors grow worried, by supporting rising consumption.

The state can and should use demand-side tools to govern the economy towards full employment and high investment. However, this division of labor between the state and the private market leaves the governance of the supply side entirely up to private capital and market dynamics. This leaves the answer to almost every important economic question up to profit-seeking private actors — what gets built, what services are provided, by whom, at what cost, over what time horizon, and to what end. Which sectors of the economy get organized in which way determines everything: prices, investment levels, who benefits, where and how people work, whether decarbonization happens at all. The supply side is currently predominantly structured by the interests, logics, and capacities of private actors, which means that when private capital fails to build, produce, or provide in the ways society needs, there is no one to hold responsible.

A state with only demand-side tools can subsidize the purchase of housing, healthcare, and childcare, but it has no power over their supply. Answers to questions of pace, scale, quality, labor conditions, and the price of essential goods and services remain dictated by private capital.

The perspective of private capital is necessarily limited to profit and increasing financialization has further narrowed its vision. Immaterial investments into patents, copyrights, and software — including so-called “Capital-Light” strategies like those pursued by NVIDIA, among others — have prioritized the development of global capacity rather than local, while domiciling profits across a range of tax havens. Private investment at the cutting-edge of healthcare and pharmaceuticals has led to rising profits and a collapse in standards of care across less-wealthy areas. With automakers needing to profit on their Electric Vehicle lines, they have chosen to shut them down and roll back investments as the Trump administration eliminates the tax breaks that made those investments profitable. At the same time, workers and communities are forced to accept Silicon Valley’s preferred adoption strategies for AI usage and the siting of data center infrastructure, because those strategies are seen as the path to highest profits in a global competition of bank accounts.

When and How the Productive State Intervenes

The Productive State intervenes where markets and private capital have demonstrably failed. That means sectors where productivity gains have been exhausted and profit has become rent extraction rather than reward for innovation, where price increases cascade through the entire economy and threaten macroeconomic stability, and where private capital has created inflationary pressures through chronic underinvestment. In sectors that meet these criteria — especially those in which social need is unconditional, or the country has policy goals which the private supply side is not organized to deliver — the Productive State brings public power directly to the supply side.

The Productive State intervenes by deploying the economic powers of public ownership to reshape these targeted sectors. In some cases, this means the use of strategic reserves to stabilize volatile prices — extending the logic of the Strategic Petroleum Reserve to encompass generic drugs, critical minerals, and commodity semiconductors alongside other raw materials and intermediate goods. Where a stronger intervention is required, the Productive State charters public corporations to serve as anchor producers capable of changing the terms on which private markets operate or displacing private capital entirely. With these tools, the most essential goods and services — healthcare above all — can be decommodified and universally provided free at point of service as public K-12 education is today.

Bidenomics got two important things right: the supply side matters and public spending should be directed toward productive ends. Between the semiconductor investments of the CHIPS Act, the climate investments of the Inflation Reduction Act, and the large-scale fiscal spending of the pandemic recession response, Biden-era economic policy put critical pieces on the board but didn’t always wire them together correctly. Where the “derisking” approach tried to reshape the supply side by guaranteeing profitability to private investors, the Productive State embraces the full economic powers of public ownership — directing fiscal spending to build and own productive capacity directly instead of solely relying on subsidizing private investment.

The Economy of the Productive State

Market organization can lead to great decisions that advance the economy’s growth and innovation frontier. But those same market processes are often terrible at stability and maintenance — at making sure no one gets left behind in the process. The results of leaving the supply side entirely to private capital are clear in our increasingly unaffordable essentials, chronic underinvestment in productive capacity and infrastructure, K-shaped labor market, and weak productivity growth (outside of a narrow band of highly profitable sectors).

The single-minded focus on profits has also dematerialized investment. As profits have concentrated in the ownership of immaterial assets — patents, copyrights, software — investment in the material side of the economy has steadily fallen as a share of GDP. Although more dollars are being spent every year, a smaller share of those dollars go to real steel-in-the-ground physical investment than ever before, while intellectual property products now account for a third of the value of all private investment each year.

As a result, the basics of a dignified life have grown more expensive as private actors decline to expand capacity in ways that might risk their profitability. In housing, we see this through a crisis of underbuilding brought on by the collapse in the financial value of housing during the Great Recession. When it became unprofitable to build, homebuilders stopped building and went out of business or consolidated. The government, lacking supply-side tools of its own, did not step in. The result is the crisis of rising prices, swelling backlogs, and soaring rents we see today.

Healthcare prices and spending have continued to rise even as the US falls in the rankings for health outcomes, spending significantly more per capita than peer countries for shorter lives and worse care. The healthcare sector absorbs a growing share of GDP while the cost burden increasingly falls on households — a structural failure better addressed through the supply side than public subsidy of healthcare consumption or income transfers.

Electricity prices, too, have risen faster than electricity output, as a fragmented and profit-driven grid struggles to support the energy transition or absorb new demand from electrification and data centers.

Solving these problems will require a Productive State capable of intervening on the supply side, taking over the tasks that private capital has shown it is not interested in doing well. By investing in and publicly providing essential goods and services at cost, the state can give society democratic control over key macro-structural economic decisions which would otherwise be made for private capital, by private capital. This means decommodifying essential goods and services, building the infrastructure that private capital has declined to build, and stabilizing systemically important prices through public ownership at critical chokepoints.

Public investment, production, and provision at this scale would transform the economy and society alike by building out a new foundation to make them work for everyone. The result would be a high employment economy with affordable essentials, stable prices, cheap clean energy and a genuine say over the economic forces that structure everyday life. With the Productive State approach, Americans will have more freedom to take the kinds of risks — starting businesses, changing careers, striking out into the wilderness — that our culture celebrates but which today’s economy makes impossible for most.

From The Economy We Have to the Economy We Want

Where do we start building the Productive State to take us from the economy we have to the economy we want?

We propose an interlocking policy architecture linking a Public investment Authority, Public Health Care, and a Federal Grid authority as the institutional and economic foundation for a high-investment, low-emission economy shaped towards democratic and productive ends.

The Public Investment Authority gives the Federal government access to the powers and tools of large-scale public ownership to plan, coordinate, invest, produce, and provide. A Federal Grid Authority would be empowered to standardize, rationalize, and decarbonize the energy system towards a goal of decommodifying basic access to energy. A publicly owned health care system where services are provided free at point of service would remove the most volatile share of household budgeting from affordability conversations entirely and curb one of the fastest-rising costs for businesses.

While we do not have space to outline the specifics of these programs here, our goal is to demonstrate that this interlocking policy architecture will build a foundation in the Public Investment Authority, then the infrastructure of the Federal Grid Authority before delivering on health care and energy for all Americans.

Public Investment Authority

To durably intervene and restructure the supply side, the Federal Government needs a central authority for orchestrating, coordinating and funding the large-scale investment that will be necessary in the economy of the 2030s. This should take the form of a Public Investment Authority capable of coordinating with firms, capital markets, bond markets, and government agencies to provide a linchpin for macroprudential supply-side governance.

Rather than derisking or subsidizing the private market, the Public Investment Authority puts long-term public capital into projects that stabilize and standardize the supply side, from grid equipment and next-generation steel and minerals to rural hospitals and urban childcare centers. Changing the structure of the economy, and not just the current equilibrium, means changing what gets built, by whom, and who owns it.

Federal Grid Authority

The electrical system plays a role in every household and process of production in the US economy. China organizes its electrical system around supporting both, while we have chosen — except in some existing pockets of public ownership — to organize the American system around extracting profits from both. This raises costs for households and firms alike, squeezing family budgets and making American goods and services more expensive on the global market.

The drive for profitability has also set up complex and sclerotic fiefdoms incapable of adapting to a decarbonizing world or supporting the load growth required to electrify major industries. The addition of a few data centers should not be an energy affordability crisis for everyday Americans, but our private grid system has made it one.

A Federal Grid Authority would intervene as a supply-side coordinator, bringing the whole network into public ownership so that it can be standardized, decarbonized, and retooled in support of our electric future. At the same time, the Federal Grid Authority can serve as a nexus point for affordability through decommodification. A social minimum of energy, like the standard deduction on federal income tax, would directly free up space in stressed household budgets. At the same time, the Public Investment Authority can continually invest in new clean generation to increase that social minimum, and eventually provide free energy to households, public schools, and even private firms.

Public Health Care

Rising demand for services, in particular health care, will be a major dynamic of the economy of the 2030s. Health care absorbs nearly a fifth of total US spending every year, and as demographics shift, demand will continue to rise, leading to expensive and rationed care without a significant supply-side buildout. As it stands, peer countries deliver better outcomes using a dramatically smaller share of GDP.

Public Health Care means decommodification and public provision — health care free at point of service, run and funded by the public sector. Instead of directing spending to the massive administrative overhead required to deny care through the insurance system, that same money can be used to expand capacity, access, and quality of care, which is also an issue of labor conditions. As with the Federal Grid Authority, the first step is to take existing assets into public ownership and then rationalize, reconstruct, and rebuild around the task of delivering the best care at the lowest cost with the fewest middlemen between. As it stands, the sector is consolidating and centralizing on the supply side, but consolidation through public ownership captures those benefits without corporate profiteering or bloat.

This will have to be done in stages, and second-order effects will need to be managed, including a massive ramp-up of public investment into pharmaceutical and medical R&D as well as a national federal hiring campaign to utilize the talents of displaced insurance and administrative workers.

Bringing the state to the supply side through these three policies would revolutionize affordability for everyday Americans while providing a competitive boost to US firms on the global market. Publicly provided health care and energy would remove two of the largest and most volatile line items from household budgets while doing the same for businesses across the country. Removing these sources of uncertainty would empower workers to start their own productivity-enhancing firms while helping level the playing field between small and large businesses. These are the ingredients of an economic boom built on a foundation of pragmatism, equity, and shared abundance.

The Journey Ahead

The full Productive State will take time to build and will require a complex mixture of institutions and tools capable of adapting to a changing supply side. Right now, the Trump administration, the tech billionaires, and endless petty scammers and frauds of all kinds are looting our economy and warping our society around their noxious goals. The response must be to take up the real task of economic reconstruction to reshape the supply side around public need instead of private profit.

At Forces of Production, we will be working to put all the pieces of the Productive State approach on the board, and pursuing the research we believe will be necessary to guide our economy from its extractive present to its democratized and decarbonized future. Taking up the task of actually governing the supply side raises hard and open questions about the kind of economy we are building for ourselves and our children, how to provide stability, growth, and a real economic voice to all people.

As we are assembling a body of research organized around those hard and open questions, future issues will explore a range of topics around and beyond the following:

Affordability

• What is the difference between “inflation” and the “cost of living” and how are each measured, and how do both concepts shape “affordability” or “real wages” in different ways?

• How does the structure of production confer the power to propagate inflation on some sectors and not others, and how does that propagation shape the path of investment and capability development on the supply side and inflation on the consumer side?

• How should programs like CalRX be expanded to deliver affordability through decommodification of essential goods and services?

Public Ownership

• What kinds of dynamics will a shift from private accumulation towards public accumulation create for private markets and the global financial system?

• Which institutional pinch-points are liable to slow, alter, or prevent the rollout of Productive State interventions?

• Which sectors are the future of industrial policy, and what are the institutions required to coordinate them towards the public interest?

• How can public investment be structured to “crowd in” the maximum amount of additional private investment?

• How do we track and value public assets and the decommodified provision of goods and services? How does the value of public assets relate to the public balance sheet, the federal debt, and the obligations of the Treasury?

Growth and Investment

• What is the future of productivity growth through automation and sectoral composition, and how can we credibly measure it? Which industrial policy interventions are meant to deliver particular outcomes, which to provide jobs for workers, and which are meant to shape the basic productive capabilities of our economy?

• What are the growth trajectories for an economy organized around services, and how can we prevent the creation of a two-track K-shaped labor market that prevents people from realizing their full potential and making their full contribution?

• How will the path of AI development drive the business cycle going forward, and how do implementations of AI tools in the workforce relate to the class struggle?

Economic Structure

• What kinds of occupational roles are distributed across the economy, and how do they shape and constrain the ways we can build the economy of the future?

• What will need to be done to deliver a fully decarbonized economy, and how will that change the structure of production, affordability and global competitiveness?

• What must be done in upstream supply chains for decarbonization of electricity and electrification of the economy? How will institutions and hardware cope with load growth that far exceeds data center load growth in the transition from a petrostate to an electrostate?

• Which sectors are systemically important, where are the bottlenecks, and what could a supply-side vision of progressive globalism look like in terms of institutions and the global division of labor?

All of these questions, frankly, are just longform ways of asking how we can all work together to lend a hand against the choppy seas ahead.

If that simple, basic question interests you, then welcome aboard.

This Month’s Data

Here, we are looking at the May data, released over the course of June, with the exception of trade, which is released on a two-month lag, so there we are looking at data from April. Overall, we see the peak of the Hormuz shock (so far) in the PPI data for May and continue to see strong performance from Computers & Electronic Equipment, Electrical Equipment and the broader fossil fuel complex. To the extent that there is a single thematic, it is that the economy is building the Graphics Processing Unit and Power Supply for the nationwide meta-computer, and the terrain of struggle is over what kinds of sources will be fed into that power supply, and what it means for regular grid customers.

Everything outside of this thematic is a bit adrift, with prices broadly rising on the oil shock, capacity utilization holding steady, and industrial production inflecting upwards as the above thematic passes through different levels of the relevant supply chains. Even after revisions, employment additions came in strong even as, on balance, workers continue to slowly exit the labor force, holding down the unemployment rate.

Employment

May payrolls rose more than expected in the initial release, by 172,000, but after the first revisions to the May data released last week, measured employment actually only increased by 129,000. Despite this, financial markets broadly interpreted the ongoing rise in inflation alongside a growing labor market to indicate more interest rate hikes from the Fed in the back half of the year.

Looking at just the Service sector, Health Care continues to lead growth. Interestingly, despite the steady increase in production and imports for Computer Equipment, employment in Information Services continues to fall against the previous year.

Real Estate and Finance & Insurance are also beginning to see some acceleration in employment decline, with both going from +0.5% growth a year ago, to a 1.1% and 1.2% contraction, respectively, in the May data.

On the Goods side, we see employment in Construction beginning to mount a comeback, with Utilities and Electrical Equipment still consistently adding the most employees. Textiles and Apparel continue to be in acute distress, losing nearly 5% and 10% of total employees, respectively, over the past year.

Industrial Production and Capacity

Durable Manufacturing and Utilities continue to inflect upwards in the May Industrial Production data, while Mining decelerates and Nondurable Manufacturing continues to contract. We see little movement from month to month which remains an improvement compared to the month after “Liberation Day”.

On the capacity utilization front, things continue to hold steady, with refineries ramping down a touch on the Hormuz crisis and Nonmetallic Minerals ramping almost 5 percentage points over the past six months.

Prices

Producer Prices jumped dramatically in the May data on the strength of the Hormuz oil shock. We are beginning to see those prices pass through to other industries dependent on petroleum distillates in the May data, with goods production hit harder than services.

Looking across Goods-Producing sectors, we see some extreme price pressures due to Hormuz, but also long-simmering price pressures in Primary Metals, Mining ex-Oil & Gas, and Computers and Electronic Equipment. These are largely down to demand-pull dynamics as the AI thematic intensifies.

In Services, we see a much more subdued picture outside of industries with direct exposure to petroleum distillates: Air Transport, Truck Transport and Messengers and Couriers all reported double-digit year over year increases.

Trade

Exports continued to grow in the April data, supporting a narrowing of the trade deficit despite a slight bounceback in imports.

Going by sector, we see shrinking imports across much of the board, with the biggest declines for imported chemicals. As the Hormuz shock propagates, Chemicals are an important node to watch how it may force unexpected changes in trading patterns. Petroleum and Coal Products imports growth turned positive on the year in the April data, reflecting significant pricing impacts.

Exports grew in nearly two-thirds of sectors, year over year, in the April data, with price moves providing wind in the sails of the biggest gainers: the oil and gas complex and the computers and electrical equipment complex.

The American economy, when you really look at it, is mostly people.

They are spread out across the union, working at jobs they partly get to choose and partly are forced into by the broader economy and labor market. The things that Americans do all day — and the buildings and equipment that they work on and in — determine the short and long-term capabilities of our shared economy. What we can produce depends on what people know how to do and the tools they have to do it with. The institutional arrangements — who owns what, who pays for what, how markets and governments divide up the work — determine who benefits from these capabilities, and how. The question which is really at the heart of industrial policy and macroeconomic governance is the question of which capabilities we want to build, and how we want to coordinate them.

Much of the economy of the 21st century will be organized around the needs of the growing services sector. Manufacturing remains important, and it is crucial to retain and update existing capacity, but the service economy is where most Americans already work, and its share is only growing. In terms of scale and scope, 21st century economic policy will need to take a much more intentional and proactive stance towards managing that service economy.

Programs to reorganize the structure of provision — rethinking not just who pays for services, but how they are delivered — may become a requirement to free up squeezed labor supply for other purposes. Consider healthcare, which the Centers for Medicare Services projects to reach 20 percent of US GDP by 2030 and which already employs as much as a quarter of all workers in some states. That is an enormous claim on our national resources, and the way we have chosen to organize that claim matters. Right now, our healthcare system is made extremely complex in order to ensure adequate profitability for every link in the privately provided chain. Where the government intervenes, it does so to provide funding for both customers and businesses in the sector — through Medicare, Medicaid, subsidized insurance, and tax breaks — but not to coordinate the actual provision of healthcare.

This drive to profitability has created a sector which is massively bloated compared to the international standards set by countries which often deliver better and more comprehensive care. Regardless of the extremely strong moral case for universal provision of medical care free at point of access, there is also a clear macroeconomic case that the incentive structures of the private market are the wrong way to allocate investment and employment in the care sector. With labor supply structurally impaired by low immigration rates, and fierce demand for labor from the healthcare sector in particular, we have to ask whether market-led competitive private provision of medical care will really be the best use of resources in the long term. In next month’s edition, we will begin articulating the case for stronger public provision of essential goods and services, as part of a broader engagement with the real political possibilities that a coherent approach to the supply side can offer.

But for today, our goal is not only to make this case, but to survey the pieces we have to work with in constructing a new approach to coordination and provision. We will be looking at this geography using the most basic drivers and outcomes in economics: population, employment, investment, output, and the government. Since our economic data does not go back nearly so far as 1776, our retrospective will cover a somewhat shorter period. When this country was founded, it was mostly farms and plantations, but it has industrialized in its expansion and by the 1940s we started to get real economic statistics. Since our goal today is to understand the forces shaping the 21st century economy, we will keep our aperture locked on the last 25 or so years.

Output

The US economy is huge — $23.9T in output every year, or about 22 percent of global GDP. Our question today is: where is that economy exactly?

In this map, each state is shaded by how much of that total it accounts for — darker means a bigger slice — and you can see immediately that the economy is not evenly spread across the country. The heavy hitters are basically as expected: California, Texas, New York, Florida, Illinois and Pennsylvania each produce over a trillion dollars per year. These six states would individually be the 4th, 8th, 11th, 15th, 20th and 21st largest national economies respectively, were they to each declare their own independence next month.

This map shows each state’s total GDP growth over the period in inflation-adjusted terms, with states that grew faster than the US average in teal and those that lagged in coral.

Those six biggest states split into two clean growth trajectories over the last 25 years. New York, Pennsylvania and Illinois saw their GDP grow by an average by 43 percent. Meanwhile, the sunbelt states of Texas, California and Florida grew by an average of over 103 percent. This is a massive difference, which will continue to compound and shape the geography of US growth. But why is the difference so big, almost 2.5x?

As you might have noticed, these six states are also the six largest by population. The difference between high and low output growth states is simple — population growth. In the slower-growing northern states, population grew by an average of four percent, while in the fast-growing sunbelt states, state population grew by an average of 35 percent over the same period.

The economy, like Soylent Green, is mostly people.

Each dot on the chart above represents a state. The dashed line marks where GDP growth would equal population growth exactly — the fact that nearly every state sits above it shows that output grew faster than population almost everywhere.

Employment

So firstly, what do Americans — at least the 60-odd percent of them who are currently employed — do at work all day?

Each bar shows total headcount in a major sector of the economy — and the gap between the service sectors at the top and manufacturing near the bottom tells you how far the structural shift has already gone. Trade and Transport are the biggest, managing how the goods get from where they are made or imported to where they are sold to where consumers purchase them. The biggest growth though, has been in Healthcare, which overtook Manufacturing employment at the beginning of our period, and has more than doubled it by the end to become almost 20 percent of the US workforce nationally.

The left axis shows the two lines crossing in 2001, with Education and Health pulling away ever since. The right axis shows what that means as a share of total employment: a steady climb from under ten percent to nearly 18 percent, with no sign of leveling off.

In some states, almost a quarter of working people work in healthcare.

The states where Healthcare is the biggest share of private employment tend to be older and more rural — West Virginia, Maine, Vermont — where other industries have also thinned out.

Healthcare has accounted for as much as 50 percent of net employment growth in some states in the 21st century.

In states shaded darkest, Healthcare accounted for the majority of all net new private-sector jobs — and in a few states like West Virginia and Connecticut where total employment shrank, Healthcare was the only sector still growing.

Yet in recent years, Warehousing has become the fastest-growing employment sector in almost half of states.

Each line tracks how many states had that industry as their single fastest-growing sector each year — and you can watch Warehousing go from a niche in 2010 to the dominant story by 2024, displacing everything else on the chart.

But let’s get back to the national level. Every state gained jobs over this period, with the biggest gains overwhelmingly in the sunbelt and mountain west states.

The color scale here is centered on the US average employment growth rate, so a state in coral did not necessarily lose jobs, it just grew more slowly than the country as a whole. Yet looking at the state level hides how geographically concentrated this growth has been, and the politically and economically salient urban-rural divide it has created.

Metro counties, defined as those containing or adjacent to a city of 50,000 or more, cover barely a quarter of the country’s land area but employ more than eight in ten workers.

Again, the economy is mostly people, not land.

As we discussed in last month’s issue, all the employment growth over this period came from the service sector, rather than Manufacturing, which at most reallocated between states.

Where Manufacturing’s share is high (darker, top), services tend to be lower (lighter, bottom), and vice versa. Indiana, for example, has one of the highest manufacturing shares and one of the lowest service shares.

Yet we saw growth in both high-wage and low-wage sectors. In fact, the balance of growth between these two varies significantly by state, with some states adding primarily high or low-wage services, with others adding a balanced mix.

A positive number (teal) means that state added proportionally more jobs in sectors like tech, finance and professional services; a negative number (coral) means the growth tilted toward retail, food service, warehousing, and other lower-paying work.

Before we move on to questions of investment, we do have to stop for one fun chart that shows something quirky about each state, and what jobs people have there.

Each state is colored by the broad type of industry it leads in — teal for Natural resources, orange for Durable Manufacturing, coral for Nondurable Manufacturing, and shades of green for Services — so you can see the economic geography at a glance.

I think the funniest for me is “Non-bank Lending” in Delaware, home of the credit card companies, but please sound off in the comments with your favorites.

Investment

So, the economy is people, and those people work at jobs, but what about the equipment they use at those jobs? To make output, labor still needs to make use of buildings and equipment. The question now is which equipment? And where?

Investment and capital geography are tricky to explain. This is partly for theory reasons — the fact that capital goods cannot be defensibly aggregated into dollar values animated one of the biggest scandals of 20th century economics (and does, despite our measurements here, remain substantially unresolved) — and partly for the practical reason that the US government does not report many statistics about them.

At the state level, our best bet for looking at investment or the capital stock comes from the Economic Census, conducted once every half-decade. These figures are book values — what manufacturers originally paid for their buildings and equipment, minus depreciation — so they understate replacement cost, but they are the best state-level measure of installed productive capacity that the government publishes. They only report for manufacturing industries, so the most we have is a measurement of the capital stock in 2022, and the pattern of investment spending by state in 2022.

The investment rate tells you what fraction of the existing capital stock each state is adding to or replacing in a single year — a higher number means more active building, while a lower number suggests manufacturers are mostly maintaining what they already have.

Arizona was an outlier in 2022, with massive semiconductor fabs then under construction in the area. Otherwise, investment rates remain broadly consistent across states.

What is more interesting is the direction these states are investing in — which manufacturing industries were spending the most in each state to build new capital as of 2022.

Food manufacturing (coral) leads in 14 states, reflecting the fact that food processing plants tend to be located near agricultural supply rather than near population centers — so states like Wisconsin, Iowa and Arkansas show up prominently.

Fiscal

The government is already a massive participant in the economy, and a participant at different scales in different state economies. Transfer payments account for 20.4 percent of national income, and non-transfer government spending accounts for a further 10.8 percent of annual GDP.

Government here includes federal, state, and local spending that shows up in GDP — military bases, public universities, state agencies — but does not include transfer payments like Social Security or Medicare, which flow directly to individuals.

The government share is bigger in some places than others, but it is declining almost everywhere:

The decline has been nearly universal even as the services the government funds — healthcare, education, infrastructure — continued to grow in demand.

Meanwhile, transfer payments have continued to expand, making up 20.4 percent of national income and almost 40 percent of income in some states, with Medicare and Medicaid included.

Transfer payments include Social Security, Medicare, Medicaid, disability insurance and veterans’ benefits — money the government sends directly to individuals rather than spending on its own operations. In states like Wyoming and Florida, these flows now make up nearly a third of all personal income.

While healthcare is growing everywhere as a private industry and employer, so are the transfer payments to support it across all levels of government. A key question for the US economy in the 21st century will be to ask: is this really an efficient way to coordinate the provision of healthcare?

This Month’s Data

Here we are looking at the April data, released over the course of May, with the exception of trade which is released on a two-month lag, so we are looking at the March trade data. This feels a bit like a lookback given the speed of the news lately, but enough of the economy has continued along existing trends despite the closure of the Strait of Hormuz that there is a sense the economy is almost on autopilot until the constraints really bite.

In this table, we see the main stories of this month’s data.

Petroleum and Coal Products is running flat out in capacity terms alongside growing output and export volumes while prices go essentially vertical. This is a textbook response to an external supply shock like Hormuz — producers are working overtime in pursuit of global demand.

In the time since this data was released, the success of temporary management measures (reserve releases and demand throttling among them) as well as public jawboning have brought spot and futures prices for oil and refined products down some since April, but this will move back up as solutions prove increasingly unrelated to the real problem of the supply of molecules. The value of exports will likely continue to track changes in price.

Electrical equipment continues to add employees and expand output while holding price pressures relatively contained despite high-capacity utilization and a changing trade picture. All over the world, electrical equipment supply chains are being stressed by the shift towards electrification and the needs of new generation capacity.

Computers and electronic products are seeing growing production while continuing to shed jobs against rising prices. The value of imports and exports both continue to rise on rising prices and volumes. As the data center buildout continues to expand, demand pressure for chips is likely to remain tight for businesses and consumers alike.

In the data for next month’s release, we will expect to see some moderation in petroleum price growth representing the easing in May, but for other trends to largely continue as before, with a continued sense of autopilot.

Employment

Overall employment posted weak and slowing growth year over year, with Goods employment slowing its slide. Services employment growth continues to dominate.

On the service side, the fastest growing sector — Healthcare — has seen a deceleration in job adds, downshifting from 3.6 percent year over year growth nine months ago to 2.8 percent in April’s numbers. The information sector extended its employment decline as well, accelerating from a 1.2 percent year on year decline six months ago to 3.2 percent in April.

Electrical equipment continues to post the strongest employment growth on the goods side — 2.1 percent year on year growth is close to the healthcare sector’s 2.8 percent, albeit on a smaller base — while the Textiles and Apparel complex posts the biggest losses.

Industrial Production and Capacity

Growth in durable goods output has kept total industrial production growing for the past year, and the trend continues in April’s data.

The main stories here are that growth in Durables output, which is coming from Computers and Electronics, Transportation Equipment and Machinery, which we see in the top right of the heatmap.

We see wide dispersion in capacity utilization but also that refineries have come into the Hormuz shock running close to maximum capacity already.

Prices

Producer prices ticked up significantly in the April data, pulled upward by substantial increases across the entire mining-and-refining complex, for both oil and gas to refined products as well as other mining to primary metals production.

On the Goods side, we see prices rising around 4 percent year over year for the median sector.

The Services side shows stronger inflation, with Truck Transport prices up nearly 15 percent year over year in the April data (as an aside, in last year’s April data this number was essentially zero). Air Travel, Couriers, Transport Support, and other sectors exposed to the coming price shock in refined petroleum products all showed significant price acceleration in the April data, with more to come as the impact spreads across the full production network and firms react.

Trade

The trade deficit continues to fall on both falling imports and rising exports for 2026. The March trade data is no exception.

Outside of Computers and Electronic Products, import values are broadly falling.

Exports are more mixed, with half of industries posting falling Export values and half rising. The biggest increases have been in Primary Metals by far, but Computers and Electronics have shown remarkable acceleration over the first quarter.

How It All Adds Up

Overall, the feeling continues to be one of an economy on autopilot in an accelerating news cycle, with real shocks coming down the line. The second Trump administration has taken a series of swings at the foundations of economic growth — tariffs that raise input costs for domestic manufacturers, immigration enforcement that tightens an already constrained labor supply, the closure of the Strait of Hormuz sending energy prices vertical, and cuts to university funding that threaten the pipeline of both science and services spending in American towns.

Each one of these will have real impacts on the productive economy, but we can’t see most of them in the data yet. The economy does not turn on a dime. Policy changes take months or years to work their way through supply chains, hiring decisions, and investment plans.

In the meantime, the economy is being carried forward on its preexisting trajectories by sheer inertia. What we can see in the April numbers is exactly that momentum — the same sectors growing, the same sectors shrinking, and the same patterns we have been tracking for months continuing largely unchanged. The question is not whether these shocks will show up — it is when, and whether we will have done anything to prepare for them by the time they do.

We do see some evidence of the Hormuz shock, both in its immediate impact on the sectors with direct involvement — petroleum and refining — as well as the beginning of what is likely to be at least a year of pricing upswing among industries that remain major users of refined petroleum products.

So far, in the April data, everyone seems to be counting on a return to normal for oil markets without lasting long-term damage to global refinery infrastructure. How likely that outcome actually is, is anybody’s guess, but if things keep going the way they have been, we will certainly see prices go up.

No matter how many times the story of the shift to services is told, this is still a striking chart. In a way, it is just a continuation of a longer shift out of agriculture, which begins at about 10 percent of GDP in 1947 and falls to 1 percent by 2024. But really by 1947, most of the historical shift out of agriculture had already finished, meaning modern economic statistics only show its last moments.

So, what stands out about this story now?

Maybe most striking today is the fact that, despite this shift, policymakers and commentators still seem to see the supply side as mainly a place where goods are shipped out of factories (ideally for export), and only sometimes a place where skilled practitioners add value by performing services. For example, Biden-era industrial policy focused primarily on manufacturing, and yet counterproposals to it bid to go even further in the direction of “techno-industrial policy”.

Now, this is not to say that manufacturing doesn’t matter. A strong manufacturing sector is critical for developing and maintaining the kind of economic complexity that ensures resilience and drives growth. Manufacturing participates directly in the processes of technological innovation: if a new advancement cannot be manufactured as a product, its full potential is unlikely to be realized. While manufacturing is critical — not least for providing the necessary substrate for high-value services — an industrial policy that only addresses the 20 percent of GDP involved in the production of goods will encounter significant limitations.

Against the background of this limited industrial policy, a growing chorus of commentators has started to notice something significant is happening with services — especially healthcare — as a force unexpectedly reshaping the supply side.

Conor Sen, writing in Bloomberg, argued that with the labor force barely growing, today’s labor market story isn’t about a market propped up by healthcare gains, but rather that the demand for healthcare services is pulling more labor in from a fixed pool, producing employment declines in other sectors. On this view, it’s the unstoppable force of an aging population meeting the immovable object of Trump Administration immigration policies that is pulling workers out of the rest of the economy.

Karthik Sankaran, writing in the Financial Times, took the argument further, claiming that US excess healthcare spending — roughly $1.5 trillion per year (at around 5 percent of GDP) above what peer countries spend for comparable or better outcomes — is the “dark matter” of global trade imbalances. This rising demand, combined with the profitability incentives of layers of insurers and administration, has created a massive and inefficient non-tradeable sector that raises the real exchange rate, inflates employer costs, and makes American exports less competitive. This in turn reinforces the difficulties US domestic manufacturing faces in terms of capturing the aggregate markup produced by large US fiscal deficits.

These are two different problems. Domestically, healthcare is distorting labor markets. Internationally, healthcare costs may well be distorting the terms on which the US trades with the rest of the world, to the detriment of domestic and global manufacturing structure. Neither dynamic is being managed since the current system has no mechanism for planning around any of this — supply chases demand based on profitability and regulatory constraint. The result is a sector that grows steadily, but by accident rather than by design.

To be effective at addressing the cost of living crisis, future industrial policy programs will have to engage with services directly, especially in the care sector. As the Roosevelt Institute’s Suzanne Kahn has pressed the Biden Administration, the US does need an industrial strategy for care work. However, the form that that industrial strategy takes may need to be more radical than even the $6 trillion version of Build Back Better. For his part, Karthik proposes we consider addressing these imbalances not through tariffs or capital controls, but rather through the establishment of “a national single-payer healthcare system funded by a Value Added Tax that delivers universal coverage at roughly 12 per cent of GDP”.

This might sound wild, but it’s worth thinking about what those numbers mean in context: the tax increases required might not even be that bad. The federal government currently spends around 5-6 percent of GDP on healthcare, while state and local governments kick in nearly another trillion dollars, spending which the Centers for Medicare and Medicaid Services estimates will rise towards a total over 20 percent of US GDP for health care spending by 2033.

At that point, even mainstream slogans for healthcare reform might start sounding a bit more like “Nationalize and Rationalize”!

Battle of the Century: Goods vs. Services

But before we get too far into policy — and this is a macroeconomic data newsletter, after all — how is the economy actually broken up into industries which produce goods and ones provide services in the data?

Now, these all seem pretty reasonable, but the distinction between goods and services is not quite as clean as it looks. The classification system itself, NAICS, does not actually define the difference — it groups industries by similarity of production process, and the goods-versus-services distinction is layered on top by the statistical agencies as a practice.

Goods-producing industries tend to be capital-intensive: they invest heavily in equipment and facilities, they automate where they can, and they generate a lot of output per worker. Service-providing industries tend to be labor-intensive: the work is the product, and generally workers cannot be directly replaced by a machine without changing the service provided. That difference in how capital and labor relate to each other turns out to matter enormously for how the two sides of the economy behave over time.

Let’s look at how these contributions to GDP have evolved by industry, rather than just at the goods vs services level.

One way to look at this chart is to see a financialization story, where Manufacturing trades places with Finance and Real Estate, as the former slides from 25 percent of GDP to 10 percent while the latter leaps from 10 percent to 21 percent. Another way to look at it is to see that the combined share for Manufacturing, Professional and Business Services, and Finance and Real Estate has risen slightly from 38 percent to 44 percent, suggesting a kind of continuity.

But the supply side is more than just the output as measured by GDP, whether of goods or services. Most importantly, the supply side is employment.

Over the last seventy-five-odd years, service provision grew from half to five-sixths of all employment. Goods production shrank from a third to 13 percent. Agriculture practically disappeared, falling from 15 percent to one percent of employment. Since goods-producing sectors can usually automate production and substitute capital for labor more effectively than service-providing sectors, their share of total employment falling faster than their share of output was to be expected.

So breaking employment down in the same way as GDP, where do people actually work today?

More Americans work in Heath Care and Social Assistance today than in the entire goods-producing side of the economy. Twenty-seven times as many people work in Arts & Entertainment than Petroleum and Coal Products refining. Finance, Insurance, and Real Estate together represent 5.7 percent of employment and 21 percent of GDP.

Sadly, we don’t have granular employment data as far back as GDP data, so in looking at how these employment levels have changed over time, we have to start the clock in 1990.

Employment in Health Care and Social Assistance has nearly doubled since 1990 to become the largest employment sector, while Manufacturing has been nearly halved, moving from second to fifth place.

But what do these changes really look like for each sector individually? How many jobs have actually been gained or lost in the changing ranks on the leaderboard?

Interestingly, goods-production employment has changed significantly less than service-provision employment has over the past thirty-five years. It did fall, by 10 percent, while the service sector added nearly twenty times as many jobs as the goods-producing side lost.

Looking at the employment transition over time, the role of the business cycle stands out the most. During expansions, service-providing industries add jobs while goods-producing employment largely holds steady. When recession hits, employment in service-providing industries holds steady while the goods-producing industries lose jobs. It is also interesting that even as the share of employment in goods-producing sectors fell precipitously, the absolute number of jobs on the goods producing side has remained relatively range-bound.

This Month’s Data

Employment

Nonfarm payrolls added 178,000 jobs, and the unemployment rate held steady at 4.3 percent, which markets read as supporting the Fed’s decision to hold interest rates. Healthcare and Social Assistance accounted for 76,000 to 90,000 of the total gain, but many of those gains came from workers returning from a strike rather than new hiring. Wage growth continued to cool: average hourly earnings rose just 0.2 percent month-over-month and 3.5 percent year-over-year, the lowest annual pace since May 2021.

The slowdown over the last three years is the main dynamic here, even if the March jobs numbers ticked up. Indeed’s Hiring Lab argued that despite the headline beat, the underlying labor market is in a “defensive posture” — low hiring, low layoffs, historically low quits. Fortune and Bloomberg both emphasized that the report beat expectations by a wide margin but cautioned that geopolitical headwinds from the Iran conflict and energy price spikes pose downside risks to future job growth.

The overall picture is one of a labor market that appears strong on the surface but whose underlying momentum, after accounting for demographic shifts, is much weaker than the headline suggests.

The sector heatmap confirms the story of strong growth in Health Care employment against broad-based weakness.

Industrial Production and Capacity

The March 2026 industrial production report missed expectations, with total industrial production falling 0.5 percent month-over-month against a forecast increase. Capacity utilization fell to 75.7 percent from 76.1 percent, landing 3.7 percentage points below the 1972–2025 average of 79.4 percent.

Defense and space equipment production rose 3.2 percent, aerospace grew 6.2 percent, and computer and electronic products gained 3.6 percent — all sectors benefiting from CHIPS Act investment, defense spending related to ongoing conflicts, or both. Business equipment was up 4.6 percent year-over-year.

We continue to see a rebound in the industrial production data over the past year. While recent readings have turned down, ultimately the index has remained remarkably steady.

Output growth remains the strongest in Computer and Electronic Products, as well as Electrical Equipment, both sectors whose products remain will remain in high demand throughout the data center buildout and decarbonization processes, while over half the industries show output contracting year-over-year.

Capacity Utilization largely confirms the production data, with the bulk of the manufacturing economy sitting below historical utilization rates, while Electrical Equipment utilization rates continue to confirm high demand for the sector’s products.

Prices

The PPI release on April 14 offers partial relief from the hot CPI earlier in the month. Producer prices for final demand rose 0.5 percent month-over-month — well below the consensus forecast of 1.1 percent. But to be clear, All Goods PPI still hit 4 percent, the highest since February 2023.

The combined CPI-PPI picture: consumers are already feeling the energy shock at the pump, but the measured pass-through to broader producer prices has so far been less severe — the question now is not whether the pipeline pressures (intermediate goods, tariffs) will push future readings higher, but just how high they will go.

Perhaps the funniest thing about this table is the Strait of Hormuz closure causing the sudden flip of Petroleum and Coal Refining from a source of disinflation to the clear inflation leader at the top right: from light blue to dark red.

On the services side, everything but Broadcasting saw rising prices.

Trade

The March 2026 international trade report, released by Census and BEA on May 5, showed the trade deficit widening to $60.3 billion — up 4.4 percent from February’s $57.8 billion. Imports rose 2.3 percent to $381.2 billion while exports grew two percent to $320.9 billion. On the export side, the Iran conflict was visible: fuel exports rose roughly 25 percent as Middle East disruptions pushed US energy exports higher.

Yet the dominant story was AI infrastructure spending. Capital goods imports hit a record $120.7 billion, driven by computer equipment, semiconductors, and accessories for data center buildout — computer accessories alone surged by $2 billion in the month. The most structurally significant analysis came from the Federal Reserve Bank of Minneapolis, covered by Fortune: AI-related products now account for roughly 23 percent of all US imports. AI imports grew 73 percent since 2023 while non-AI imports grew just 3 percent.

Investment

The Q1 2026 GDP advance estimate showed real GDP growing at a 2.0 percent annualized rate: a significant rebound from Q4 2025’s 0.5 percent but still below the consensus forecast of 2.3 percent. But structures investment — both residential and nonresidential — declined, with manufacturing structures leading in the nonresidential drop.

Bloomberg and The Washington Post both led with the AI investment story — Bloomberg calling it the “primary growth engine” and the Post noting that equipment was up 17 percent quarter-over-quarter. The broader picture: the US economy in Q1 2026 was being pulled forward by AI-driven capital investment and dragged by energy-cost-driven inflation eating into consumer purchasing power.

How It All Adds Up

The economy is still in limbo. The Iran war and its oil shock hang over every dataset this month, being visible directly in energy prices and indirectly in the caution underlying hiring and industrial production decisions.

But the overall picture is one of an economy that is constrained by supply, rather than demand. That changes how everything works — unemployment stays low even as job creation slows, because there are fewer workers to employ. Inflation stays sticky because businesses cannot expand output by adding people and the two biggest structural forces in the data are pulling in different directions. Investment is flowing into AI while employment is flowing into healthcare — the only sector consistently adding jobs at scale, absorbing workers that the rest of the economy is learning to do without.

Whether those two currents will complement each other or compete for the same resources is the question the next few months of data will start to answer.

And, as, I guess, predicted by Larry Summers in 2023, inflation is on its way back. The US has started a war with Iran, seemingly with the strategic goal of increasing inflation by creating a second 1970s-style oil shock. As a longstanding advocate for “Team Transitory” during the pandemic inflation, I have to admit, I did not see that one coming. Although to be fair, Paul Krugman didn’t either.

But an oil shock is also a great opportunity to explain the idea of “systemically significant prices”, and show how the mathematical machinery used to identify those prices can produce benchmark forecasts for inflation when supply shocks happen. The Consumer Price Index (CPI) data released last Friday show headline inflation of 0.87 percent month-over-month (11 percent annualized!), of which 0.67 percentage points — more than three quarters — came from direct energy price increases alone. The method we work through here would lead us to expect a further price increase on the order of 0.85 percentage points over the next few months as indirect effects push price increases through the supply side.

By now, we all know the basics. On February 28, the US and Israel attacked Iran, and Iran retaliated by closing the Strait of Hormuz to oil tankers. As we are drafting this newsletter, it is not clear how many directions this conflict will take, how and when it will be resolved, or how stable any resolution will prove. Even stockpickers are putting boots on the ground to monitor the situation at the Strait. Last week, the plan seemed to be for Iran to start charging tankers a buck a barrel to cross, but by the time you read this, it will likely be something else entirely.

The qualitative shape of an oil shock is familiar, but a shock of this magnitude is not.

The oil shocks that defined the 1970s and produced widespread shortages removed, at their worst, about five million barrels per day from global supply. The Ukraine War shock that pulled inflation up through 2022 and 2023 removed about three million barrels per day. The Hormuz closure, if the strait remains closed, takes out roughly 20 million barrels per day — about a fifth of total global petroleum consumption, something like seven times the Ukraine disruption.

A Tool for Thinking about Inflation

In response to the 2022 inflation episode, economists and policymakers went looking for tools to better understand how specific narrow price shocks can produce broad-based inflation.

In particular, Isabella Weber, Jesús Lara Jauregui, Lucas Teixeira, and Luiza Nassif Pires published a paper using the same input-output tables we used to look at tariffs last month to show how these price shocks evolve. For a given industry, they simulate a price shock to see how it propagates through the network of who buys what from whom and show how much the resulting cost cascade would increase the price index if the shock were passed along completely at every step.

The method creates a distinction between two kinds of inflation. The first is direct inflation: the price of a thing consumers buy goes up — housing costs rise, and the housing component of the CPI rises with them. The second is indirect inflation: the price of an input rises, and the price of something consumers actually buy rises with it — aluminum gets more expensive, and the cost of a can of soda goes up a few cents.

“Systemically significant prices” are the set of prices which, when shocked, produce the largest combined increase in direct and indirect inflation.

But, if you think about it, indirect effects for the consumer are just a sequence of direct effects between different industries which all end as direct effects on the consumer. A shock to crude oil raises the price of refined petroleum products, which raises the cost of running a trucking fleet, which raises the cost of delivering groceries to the store, which raises the price you pay at the register.

We can trace the whole sequence through the input-output tables and track a single upstream shock all the way out to the consumer economy as a whole.

From Crude Oil to Everything Else

Since we are facing another oil shock, let’s see how its direct effects turn into its indirect effects.

The first round of an oil shock is simple: the price shock is mostly paid by oil refineries. In the second round, that price shock fans out through refined products to different sectors in different roles. The final products of some sectors are basically made of the stuff — asphalt is not far from solidified oil — while other sectors rely on other refined products like fuel in transportation, or as feedstock for plastics, pharmaceuticals and fertilizers.

The third and fourth rounds move from those sectors to the rest of the economy. By the fourth round of tracing impacts, around 85 percent of the total indirect impact from the price shock has been passed on to consumer prices, through over hundreds of different industries. The remaining 15% of the indirect impact is spread across an indefinite echoing tail of longer paths.

However, it is important to remember that the price model used in this model computes these price shocks as if they propagate through all rounds instantaneously. In reality, firms across the affected industries have to decide to raise their prices sequentially, over time, to actually pass these price increases through to consumers. In the case of “Seller’s Inflation”, firms might even use the upstream price shock to raise their prices by more than their input costs increased.

So now that we understand how both direct and indirect inflation work, which prices are actually systemically significant according to this model?

Back-of-the-Envelope

So, what does all of this mean for inflation? The table above gives us some tools to investigate.

Let’s start with oil extraction by itself. In Weber’s model, oil and gas extraction has almost zero direct CPI weight — consumers do not buy crude oil — so its entire impact on inflation is indirect. Every cent of its CPI effect has to propagate through the production network before it reaches consumer prices. In the table below, we have extended Weber’s model to speak in terms of CPI rather than PCE inflation, and to break out the direct and indirect contributions separately.

Brent crude is currently running at about 1.7 standard deviations above its pre-war baseline, which implies a minimum of 0.62 percentage points of indirect CPI inflation working its way through supply-side channels. Because these are all indirect effects — cost increases that have to pass through refineries, then through chemicals and transport, then through the industries that buy from them — they will not arrive in the measurement system all at once. This tells us the oil shock will be with us for a while, accumulating as it propagates.

But crude prices are only half the picture. We are also seeing strikes on refinery infrastructure in Iran and across the Gulf, and the resulting supply crunch in refined products has pushed downstream prices harder than upstream ones. Gasoline, diesel, and jet fuel have all moved more aggressively than the crude oil they are made from, as rationing dynamics take hold in the refining sector. To understand the full inflation picture, we need to look at the entire oil and refining complex.

The shock to refined products has so far been larger than the shock to crude — petroleum and coal products PPI is currently running at about 1.9 standard deviations, compared to 1.7 for extraction. And unlike extraction, refining has a substantial direct channel to CPI: consumers buy gasoline, heating oil, and propane directly. At 1.9 sigmas, the model shows 0.67 percentage points of direct CPI impact plus another 0.23 percentage points of indirect impact, for a total of 0.90 percentage points from the refining shock alone.

We can already see this playing out in the March CPI data released last Friday. Gasoline prices rose 21.2 percent in a single month — the largest monthly increase since the series began in 1967. Fuel oil was up 30.7 percent. The energy index as a whole jumped 10.9 percent, its biggest move since September 2005. That is the direct channel from the refinery shocks arriving. But core CPI — everything except food and energy — came in at just 0.2 percent, right on its recent trend. The indirect effects, the ones that have to work through petrochemicals and transport and packaging before they reach the register, have not shown up yet. They will.

Now, we would expect the direct component to show up relatively quickly as companies pass through higher input costs. But the CPI and PPI measurement windows do not perfectly align, which means the unmeasured present is always running a step ahead of the measured past. Even after that record gasoline print, there is still significant direct and indirect inflation in the pipeline from closure that has already happened.

The longer the strait stays closed, the worse these numbers will get.

Conclusion

The price of oil is systemically significant because it propagates.

The tables above quantify the direct hit, but the cascade we traced from crude to everything takes time to work through contracts, inventories, and pricing cycles. March CPI showed the fastest month-over-month increase in gasoline prices in the index’s history, and that is only the first round — the direct effect. The indirect effects, the ones that move through petrochemicals into plastics, through diesel into trucking, through trucking into groceries, will take months to fully pass through.

We should already be preparing for the inflationary consequences of the strait closure to last through the midterm elections at minimum. At the same time, negotiations seem unlikely to resolve the underlying problem given the counterparty reliability issues involved.

Economic policy has become increasingly entangled with foreign policy, and the Trump administration had been benefiting from a quiet tailwind: falling energy prices were canceling out some of the aggregate price impact of its tariff regime. That tailwind will now become a headwind.

It is also worth noting that there is an obvious temptation to use the Strategic Petroleum Reserve to paper over the economic consequences of a foreign policy disaster here. The problem is, unlike the disruption during the Ukraine war, the SPR is not up to this task. It can release 4.4 million barrels per day running flat out — roughly a quarter of the twenty million lost through closure of the strait — but even at Hormuz flow rates, the entire reserve holds less than three weeks of replacement supply. The SPR is a price buffer, not a substitute for global markets. Fixing inflation requires a solution to the geopolitical problem; the SPR cannot do it alone.

This Month’s Data

Employment

Total employment growth continues to decelerate towards zero in the March employment data.

Usually employment growth sliding towards zero would be a warning sign for the labor market, but according to a FEDS Note published last week, there are deeper problems. The Trump administration’s approach to immigration policy has slowed population growth so sharply that 2026 is on track for the weakest year since 1951. This is, fundamentally, a negative labor supply shock.

What this means, somewhat grimly, is that the breakeven pace of monthly job creation — the number needed to keep the unemployment rate from rising as the labor force grows — could fall to “nearly zero, requiring less than 10,000 new jobs per month in 2026”, down from about 85,000 in 2025. If breakeven is essentially zero, we could see the unemployment rate hold steady even with the aggregate jobs number flat or modestly negative. Another “year with no jobs, but no recession”, as Claudia Sahm has termed it.

We can see the same picture in the sectoral breakout as in the headline: goods-producing industries are shedding workers, tech remains in correction as pandemic-era surge hiring continues to unwind, and health care sector employment is growing four times as fast as total employment.

Industrial Production and Capacity

Industrial production is up 1.6 percent over 2025 levels and 2.6 percent over 2017 levels. Manufacturing has fallen below its 2017 level. Capacity utilization is 76.3 percent, within a tenth of a percentage point of its 2017 average.

I keep harping on these 2017 numbers because Oren Cass has a new piece in the FT citing rising industrial production as evidence that the Trump tariff regime is working.

But if we look at which sectors are actually driving the acceleration, the data doesn’t quite match the story.

The only sector in the top five of this table with any connection to tariffs is primary metals. Oil and gas extraction has no tariff story, and rising computer and electronic products production is a CHIPS Act and onshoring story whose trajectory was set before Trump returned to office.

The semiconductor timeline makes this disconnect concrete. The CHIPS Act was signed at a local peak in capacity utilization, and measured capacity begins inflecting upwards as federal dollars translated into investment in the sector. Two years later, inflation-adjusted investment in manufacturing-related structures hit its own peak — right when output began inflecting upwards while utilization rates held steady. That is the shape of the CHIPS Act working its way through the data. The tariffs had nothing to do with it.

Prices

Producer prices on final demand have been running steady around three percent year-over-year for several months.

Breaking out producer prices for goods-producing sectors, we see prices rising over ten percent annually for primary metals, mining ex oil and gas, utilities, and computer and electronic products. We also see acceleration over the last six months of readings, rather than deceleration, suggesting these price rises will continue.

As it stands, the only goods-producing sectors holding the headline down — petroleum and coal products and oil and gas extraction — will soon be some of the biggest sources of inflationary pressure. When that happens, the offset that has been keeping headline goods PPI near three percent disappears, and the rest of the matrix is already running well above that pace. The headline will have to move with them.

The services heatmap shows rising prices largely concentrated in wholesale trade and the retail margin sectors that sit immediately downstream of it. The only significant price decreases come from broadcasting, continuing a long deflationary streak.

Trade

In the January data released in March, we see imports continuing to shrink, but at a decelerating rate. Export growth is rising at the same time, which cashes out to a modest improvement in the trade balance.

The same sectors whose output we see lagging in the industrial production data continue to see declining exports. Interestingly, many of them are also seeing declining imports, suggesting a demand problem as much as an issue of competitiveness. In contrast, computer and electronic products are moving in both directions at speed, with exports up 35.5 percent year-over-year and imports up 53.2 percent. This is what a globally-integrated semiconductor supply chain looks like in motion.

Yet, outside of extraction and tech, we see imports and domestic production are both down. Whatever is replacing the imports is not US manufacturing.

What It All Means

What this month’s data captures is a system that has been holding remarkably still in the moment before a major oil shock. Industrial production hovers around 2017 levels, capacity utilization has been roughly unchanged for a decade while employment is decelerating towards a structurally lower breakeven growth rate. Producer prices are running near three percent — things have calmed down on the supply side despite the ongoing uncertainty.

Now, inflation is coming.

But tariffs as a policy are more important to the president’s agenda than any specific legal authorization is to the tariffs, so they will likely be back soon, under different and likely just-as-challengeable authorities. There is not much sense in trying to predict which authorities, or which tariffs exactly, since the point of the tariffs is to produce a reaction, not so much to be understood.

Over the seven months the “Liberation Day” tariffs were in force, reactions were more or less constant, but only rarely impacted long-term business decisions. The chaos of implementation and the randomness of incidence meant that the economic impact was closer to the supply-side price rationing of the pandemic era, where specific inputs suddenly and significantly changed prices.

We can seesome evidence of this in the responses to Fed manufacturing surveys while the tariffs were in force: higher uncertainty about the policy environment led firms to delay or cancel investments in new capacity while waiting for the demand-side impacts to become clear. In effect, the scattershot Trump II tariffs produced a kind of mini-pandemic-supply-chain-crisis — one that is now over, and which may even be rebated if the administration can figure out the required administrative infrastructure.

Yet there is one group of tariffs that survived the Supreme Court’s ruling, which have in fact been in force since the first Trump administration: the Section 232 tariffs on steel and aluminum. These tariffs were put in place nearly eight years ago, and the rates have only gone up since then — from 25 percent on steel and 10 percent on aluminum in March 2018, to 25 percent on both when country exceptions were eliminated last March, to 50 percent on both when the rate doubled in June.

Tracking the Wily Tariff

So, instead of memorializing tariffs lost, let’s take a closer look at the tariffs that have stuck around and think through where to look for their impact. Tariffs work by changing the cost of imported goods through an extra tax, for households and businesses alike. In the consumer case — say, ordering LPs online from the UK to the US — this is relatively easy to understand: the consumer pays an extra tax on the goods they ordered.

But the Section 232 tariffs are taxes on intermediate goods used by industry. I don’t know about you, but I do not order a lot of raw steel from China to the house these days. This means that the tariffs will have some kind of impact on the relative cost structure across different industries: different sectors buy steel and aluminum, to use for different things, and that will affect profitability, competitiveness, and on a long enough timeline maybe even capital structure for the downstream industries most exposed. But which industries? And how exposed are they? To answer these questions, we have to turn to the input-output tables.

The IO tables are one of the less well-known products of the national accounts. The Bureau of Economic Analysis (BEA) produces detailed benchmarks every five years — most recently for 2017 — whichcover the linkages between 402 individual industries, mapping how many dollars flow from one industry (the seller) to another (the buyer). The diagram below shows this whole system: every arc represents a transaction between two sectors.

This is not the clearest chart in the world, but it does give a real sense of the complexity involved. The IO tables are a bit like a map of the supply side. So for our purposes, we can use the fact that the economy is coordinated through a network of purchase relationships to track how a tariff on one product propagates through the whole network to every industry that buys it, and then onwards to every industry that buys from them, onwards.

Upstream and Downstream

The Section 232 tariffs cover commodities primarily sold by the Primary Metals Production industry — NAICS 331, which includes iron and steel mills, aluminum smelting, and related subsectors. Who buys from 331? The single largest downstream customer is fabricated metals, NAICS 332: the 49,000 firms that turn steel plate, aluminum sheet, and metal bar stock into structural beams, pipe fittings, springs, machine parts, and hardware. Here is that flow as a Sankey diagram, roughly sized by dollar volume.

The IO tables give us a “direct requirements coefficient” for each buyer-seller pair — the fraction of each dollar of output that an industry spends on a particular input. For fabricated pipe and fittings (NAICS 332996), the coefficient for steel inputs is 0.197: about twenty cents of every dollar of output goes to buying steel. For plumbing trim (332913), it is half a cent, as trim is more often made from copper than steel. Steel intensity varies enormously across the 20 subsectors of fabricated metals.

To take a naive estimate of the tariff burden on a given sector, we can multiply three numbers: the IO coefficient for steel and aluminum inputs, the share of those inputs that are imported (and therefore subject to the tariff), and the tariff rate itself. This gives us an effective tariff cost per dollar of output — what we can call the tariff burden, measured in basis points.

These estimates are admittedly rough. The IO coefficients are from the 2017 benchmark, so nearly a decade old and measured before the tariffs were implemented. Import shares do shift and firms do substitute – especially as the Inflation Reduction Act drove investments into clean steel production lines – so, take these calculations with a grain of salt. But the order of magnitude is still an informativeway to connect macro and micro to see behind the headline numbers.

On the upstream side: ten primary metals subsectors, their Section 232 coverage, and how much of their own output they source from within the 331 Primary Metals sector.

Five of these ten subsectors are directly covered by Section 232: iron and steel mills, iron and steel forging, steel wire drawing, aluminum production, and aluminum foundries are all covered at the full 50 percent rate. The remaining five — copper, nonferrous foundries, other rolling and drawing — are not covered, but do purchase from the covered subsectors, so they still likely face some amount of tariff indirectly through higher input costs. The “own-sector coefficient” column shows how tightly linked these industries are to each other: copper rolling and drawing sources 67 percent of its output value from within primary metals, though nearly all of that is untariffed copper.

And on the downstream side: the twenty fabricated metals subsectors, ranked by their estimated effective tariff burden.

The range is substantial, from 4 cents on the dollar, to four-hundredths of a cent on the dollar. Metal containers are the most exposed, driven almost entirely by aluminum content. Fabricated pipe fittings bear 356 basis points, mostly steel. At the bottom, plumbing trim bears only 4 basis points — the fact plumbing trim is largely copper means the tariff is essentially invisible in its cost structure. Between these extremes, every subsector has a specific, calculable exposure that depends on three things: how much steel and aluminum it uses per dollar of output, how much of that steel and aluminum is imported, and which of its primary metals purchases are actually covered by Section 232.

Did It Work?

None of this information can tell you whether these tariffs were a good idea. That depends on what you think they were supposed to accomplish, which is a longer conversation. What it does tell you is that “the steel tariff” is not a simple cost like a consumer tariff, nor one cost borne equally across sectors. It is a whole manifold of different costs, ranging from negligible to substantial, distributed across the economy’s production network in a pattern that the IO tables make visible and that would otherwise be invisible.

These are the kinds of cross-industry impacts that need to inform policy, especially as we confront the challenge of decarbonization. In essentially every case, the real work of decarbonization is to bring down the carbon output of a sector by swapping in different equipment. How this work is sequenced and flows through the existing productive structure is critical to its short and long term success.

This Month’s Data

This last month saw new GDP data, in addition to the usual data for employment, prices, production, and trade. But first, before the charts, the key takeaways.

Key Takeaways

• 2025Q4 GDP has come in soft due to the government shutdown, but the continued growth in consumer spending, especially on services, means the macroeconomy in 2025 did not run into any of the “sudden stops” many commentators had expected.

• Instead, there was a simple and steady degradation of the growth outlook, as investment narrowed to a small number of “winner” sectors while the labor market continued to downshift on hiring, with hires rates approaching early-2010s Great Recession lows.

• Services continue to drive economic growth, in both low-margin sectors like Health Care, and high-margin sectors like Software. It would be interesting to dig in on recent rule changes that have increased the share of software work that can be counted as capital expenditures, rather than operational expenditures, to see how much that is changing the measured composition of the boom in spending on large language models and other AI-related software.

• The Iran war is already showing up as an inflationary energy shock, as oil, gasoline, and especially diesel prices have ramped up in recent days. The question now is how long the disruption will last for, and what the knock on effects will be.

• For context, a geostrategically significant amount of global oil and gas flows through the strait — roughly 20 percent of daily global supply — and in order for markets to balance if the strait remains closed, we will probably have to see prices go above $200 a barrel to see durable demand destruction at the scale of 20 million barrels per day. Oil hovered around $120/barrel in the late 2000s on strong global commodity price growth. It briefly touched the $130s during the 2022 shock, which only represented a disruption of 1-2 million barrels per day. Already, since I have started drafting this newsletter edition, oil has moved from around $60/barrel to almost ping $120/barrel spot in overnight trading. This has started pulling up the oil futures market as well as the market begins reckoning with how long the war will last.

• If they don’t sort this one out, there may not be much else to talk about besides oil in next month’s issue.

GDP

Headline GDP growth fell to 1.4 percent annualized in Q4, down sharply from 4.4 percent in Q3. The single largest drag was the federal government, which subtracted 1.15 percentage points from growth as the shutdown drove a 16.6 percent annualized plunge in federal government consumption and investment for the quarter. Absent the shutdown, growth would land around 2.5 percent — not spectacular, not weak, but a step down from stronger mid-year growth.

Consumer spending growth held steady at 2.4 percent, contributing 1.58 percentage points to headline growth. Almost all of it came from growth in services (+1.59pp); goods spending contributed essentially nothing (-0.01pp). This is in line with what we have been seeing for most of 2025: the consumer economy runs on services, not stuff. Net exports were roughly flat (+0.08pp). Inventories added 0.2 percentage points. Full year 2025 growth came in at 2.2 percent, a step down from 2.8 percent the year before. Investment in intellectual property products grew 7.4 percent, the strongest component by far, driven by AI-related software and R&D, while equipment investment grew a more modest 3.2 percent. Structures contracted for the eighth straight quarter at -2.4 percent, and residential investment fell 1.5 percent, declining in all four quarters of 2025. The investment mix continues to narrow in recent quarters: intellectual property products and equipment carry the total, while construction — factories and housing alike — continue to contract. This narrowing is broadly in line with the slow slide in investment we flagged as likely last month.

Industrial Production

Industrial production continues to grow in the most recent data, though capacity utilization still lags, and has only just begun growing in the last six months, after years of contraction.

Capacity utilization shifts were mostly positive: mining ex oil and gas accelerated by 8.3 percentage points, beverages and tobacco by 7.0. Apparel was the notable decline, losing 2.8 percentage points of output year-over-year.

The charts below rank every 3-digit manufacturing sector by year-over-year output change and pull out the top and bottom two. Among durables, the winners are the high-tech, heavy-duty end: computers and electronics up 7.7 percent transportation equipment up 5.9 percent. The losers are the lower-tech end: wood products down 4.6 percent, furniture down 2.8 percent.

Nondurables tell a bleaker version of the same story. The aggregate is barely positive at +0.6 percent. Paper is down 4.9 percent, printing down 2.7 percent. Only beverage and tobacco (+2.4%) and food (+1.7%) managed to stay above the zero line. The production recovery, such as it is, belongs entirely to durables.

Employment

The employment picture is largely the same story as last month. Ranking all 2-digit services sectors by year-over-year employment change, health care continues to lead at +3.2%, with other services growing at a more subdued +0.8 percent. The services aggregate grew 0.5 percent. At the bottom, information shed 1.5 percent and administrative and waste services lost 1.1 percent of its employees — both sectors that have been contracting for months.

On the goods side, manufacturing employment is essentially flat year-over-year, with construction leading at +1.2 percent. Mining and logging continue to contract.

Overall, no major surprises in the January data.

Producer Prices

Producer prices show two things worth watching. Ranking 3-digit sectors by year-over-year PPI change, the services side is led by securities at +9.2 percent and merchandise wholesale at +8.1 percent. The aggregate for all services sits at +2.9%. At the bottom, broadcasting and internet continue its deflationary streak at -7.9 percent.

The same ranking on the goods side puts primary metals at the top: PPI up 16 percent year-over-year — directly relevant to the tariff analysis above, and consistent with what we would expect from anow markedly higher 50 percent Section 232 rate. Mining excluding oil and gas is close behind at +14.9 percent. At the bottom, oil and gas extraction prices are down 10.7 percent, with petroleum and coal products down 5.3 percent. Total manufacturing PPI sits at +2.4 percent.

Energy prices have been softening for months but no matter how this Iran conflict goes, that trend is now unreliable as a forecast.

Trade

In trade, we see some large month-to-month swings concentrated in a few sectors. Mining imports surged 25 percentage points in their year-over-year growth rate between November and December 2025 — a sharp acceleration. Oil and gas imports also picked up (+13.3pp), as did computer and electronics imports (+11.7pp). Forestry imports fell 33 percentage points.

Exports show a mirror pattern for some of these: forestry exports surged (+29.6pp) against falling imports while computer and electronics exports accelerated (+20.1pp) on rising imports.

Our work at Forces of Production is to provide monthly tracking on the supply side data of the US economy.

Our goal is to contribute a public image of the supply side to support and sharpen ongoing conversations about industrial policy, public ownership, and new approaches to holding down the cost of living.

For more, check out our launch essay.

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In this, our first issue, we will start by introducing some key tools necessary to understanding the supply side and then, use them to tell a familiar story — the shift from goods to services on the supply side. After that, we will look at new data published last month to see if the business cycle is pointing to a crisis on the supply side.

Before setting off to see what last month’s data shows, it’s worth demonstrating how the tools we will use can explain changes on the supply side over the short and long term.

Our Methods

When we talk about the supply side, we are talking about production. Everything that is supplied to the market has to be produced by someone or something, somewhere.

On one level, this is obvious, but on another level, the supply side remains one of the great unsolved problems in economics: how to accurately model the intricate web of production capacity.

Let’s start with some definitions.

Production takes place in firms, which employ labor to use capital equipment to produce output, output which sometimes requires extra materials, services, and energy.

In the Bureau of Labor Statistics documentation, this breakdown of the production process into its component parts — capital, labor, energy, materials, and services — is reported in the KLEMS accounts. The “output” of each firm’s production process is the “supply” that we are interested in.

The biggest challenge in studying the supply side is the sheer variety. Different production processes use different inputs to producedifferent outputs. To handle this, we at Forces of Production use the North American Industrial Classification System, or NAICS Codes.In it, firms with similar production processes are grouped together by sector and industry and organized by hierarchical code: firms in the same group can more easily sub in for one another with less need to adapt their production processes than firms in different groups.

In fact, every transaction between these different sectors — each given by a different NAICS code — falls into a KLEMS category, whether capital, energy, materials or services. The rest goes to regular consumers like you and me.

Let’s see how we can use these tools to tell a familiar story with added detail — to show how these tools work before diving in to analyze the monthly supply side data.

The shift towards services, and the changing composition of those services, is the biggest story of the 21^st century for the US economy. But one of the major limitations in analyzing the supply side is the lack of output data for the service sector. Goods are more closely tracked than services in the economic data, with multiple measures of price and output. For services, data on the price of services sold to other businesses is published, but no measures of output. There is one indicator that provides data on both goods and services though: employment. Given that labor is the original force of production, employment is a great example to work from.

Employment is tricky, though, because it is so tied to the business cycle. In times of crisis, the supply side loses jobs across goods and services alike, and those lost jobs have to be rebuilt from scratch. This is what makes recessions so damaging for the supply side: existing capacity disappears, and new capacity has to be constructed from the ground up.

This dynamic has been given many names over the years, from the crisis of reproduction, to Milton Friedman’s “plucking model”, named for the fact that charts of unemployment across recession and recovery look a bit like a plucked string.

To get a sense of where we are now, let’s compare how different sectors across goods and services bounced back following the last two major crises: the pandemic and the Great Financial Crisis.

Over both swings through the macro business cycle, we saw the total employment level grow, but that growth favored different sectors.Some parts of the supply side have returned stronger than before, while others have steadily weakened over the last twenty years.

The chart above shows employment growth over both recession recoveries, across both goods and services, broken down by 3-digit NAICS code. While a few sectors saw growth across only one recovery, the majority either grew through both recoveries or lost jobs across both recoveries.

Looking at the sectors that have gained and lost employees over the past two decades will help us understand how what people do for work has changed.

Most of these industries in which employment levels grew back stronger over both crises are in the service sector, with a split between high-wage/high-margin work like Professional Services, Insurance, and Data Hosting and low-wage/low-margin work like Social Assistance, Warehousing, and Food Manufacturing.

Much of the strongest employment growth has been in care sectors, as the supply side adapts to an aging population in need of care. Warehousing and Courier employment has also grown as shopping has been increasingly rerouted from storefronts to online.

In some of these sectors — as in fabricated metal product manufacturing, or oil and gas extraction — the Industrial Production data shows output has largely been maintained despite falling employment. Yet many of the sectors showing outright declines over both recoveries have been stories of structural decline rather than productivity gain. Clothing retail employment has declined by double digits across both periods while trade-exposed industries like furniture, printing, and paper manufacturing have all seen falling employment.

Last Month’s Data

Many have been worried about the supply side, with rising geopolitical tensions and daily-changing tariffs creating an environment of incredible uncertainty.

It is easy to see this uncertainty as the source of any crisis if one arises, but the supply side of the US economy is both very large and very inertial.

Looking across last month’s data, we see a broad continuation of previous trends. Employment growth continues to slow whileIndustrial Production continues to gradually rise, led now by Durable Goods manufacturing.

Durable Goods manufacturing is also driving recent increases in Capacity Utilization as well. Producer Prices continue their gradual re-acceleration, with the greatest seller’s inflation showing up earlier in the supply chain, from Mining and Primary Metals production. Price increases for upstream materials like these can have an outsized influence on the cost of production across a wide range of industriesthat use them.

Employment

The service sector continues to drive employment gains, with Goods-Producing employment levels down slightly over the past year.

The biggest gains have all been in the service sector, with Health Care the clear standout at 3.1% employment growth since December 2024.

Interestingly given the rising producer prices in the Mining sector, we see the largest employment losses in this sector over the past year, at a 2.2% decline.

Production and Capacity

Industrial Production has begun to grow again in recent months. However, the total level of production has increased less than 2% from the index year in 2017.

At the aggregate level, manufacturing remains a story of industries shedding workers while adapting production processes to keep output roughly constant.

Interestingly, Durable Manufacturing has taken over as the source of output growth, following declines through much of 2023 and 2024.

The biggest output gains over the past year have come from industries related to Biden-era industrial policy as well as Oil & Gas Extraction, suggesting that although many industrial policy programs may have been cancelled, the supply side still benefits from the momentum they created.

The Wood Products, Paper, and Printing complex continues to show notable production declines.

Overall, Capacity Utilization continues to track the same dynamics as production, with Durable Goods manufacturing leading.

Producer Prices

The Producer Price Index — inflation statistics for goods and services sold to firms rather than consumers — has begun to drift upward again in recent months.

We see the biggest gains in the Producer Price Index at upstream points in the supply chain.

Mining and Primary Metals are significant inputs to a wide range of production processes, and rising costs for Building Materials will also hurt affordability for housing construction. Rising Utilities costs show that increased electricity demand is affecting businesses alongside households.

Analysis

Overall, we have seen surprising inertia across the supply side, despite the extreme shifts in trade policy and consumer confidence. Tariffs are up, and consumer confidence is down, but the supply side of the US economy is like a massive ship. Steering it in a different direction takes a long time, and blowing holes in the side of the hull won’t make it turn much faster.

If anything, what’s happening seems like a very old business cycle dynamic. Back in the days of Keynes and Jevons, the market economy was much smaller and cycles were driven more by investment than consumption. Early macroeconomists noticed this and identified a pattern where a slowdown in investment spending would lead to a slowdown in hiring, and in output growth. This could become self-reinforcing, because the decision to invest less was validated by the lower consumer demand from lower hiring. Since today’s economy is much more insulated by consumption spending, which remains high, this dynamic can still produce a slowdown, but it will likely be muted, protracted, and mild on its own.

Despite this, the uncertainty created by a more volatile global geopolitical situation and nonsensical domestic economic policy does seem to be having an effect on investment, at least outside of AI. Manufacturers have been saying as much in Federal Reserve surveys all year.

There is also evidence that this slowdown is feeding through to employment, with a lower hiring rate than any point in over a decade in 2025.

Should you build that new factory domestically or abroad, given the new tariffs? Should industrial policy target innovation or stability? Should you really pay that much for a basket of groceries? Answering feels like steering, but these decisions are made atop currents no one fully controls — transactional oceans that move you even as you try to move yourself.

Yet your navigational decisions — which you must make constantly — are responsible for keeping your ship intact and on course into the uncharted waters of an uncertain future. The economy can be more treacherous than thesea: new stars that don’t match old charts seem to appear and disappear; the productive forces shape the waves and tilt the skies.

Old maps of development showed a one-way path to manufacturing and modernization, yet the service sector increasingly drives developed economies. Boosters promise unlimited productivity gains from AI while the electrical system promises ever-growing lead times for the new transformers and turbines which will power the data centers behind those “unlimited gains”. Consumer spending hits new highs while consumer sentiment shows epochal pessimism, and the world adapts to Trump’s tariffs, whose effects remain far from clear.

All of us now are traveling into the open ocean of an economy whose activities are actively changing the climate that has so far made them possible.

In conditions like these, sailors have long distinguished two ways to navigate. Any sailor who can, navigates by Position Fixing. When you can see the stars, pick up the beacon of a lighthouse or satellite, or find a shoreline landmark, you can triangulate your precise position with little more than simple geometry. If the angles of the landmarks can be found, then you can fix your position as the third point of a triangle. By keeping track of these position fixes, it becomes possible to plot a trajectory, to map forces in the winds and in the seas, and to begin to find your way.

Most importantly, you know where your ship really is, in a way you can tell someone else about — maybe someone who can alert you to an oncoming squall or an invisible reef. If, say, we can see employment slowdowns and falling capacity utilization in machinery production, but demand is rising for machinery while employment in metals mining and refinement grows, we might be able to pinpoint an economic bottleneck. If we see rising importsand rising import costs, for both machinery and the metals complex, we might be looking at a global pinch-point for capital goods used to produce machinery.

But if position fixing is impossible, you fall into a position that sailors have long dreaded: Dead Reckoning. Without stars or landmarks, the best you can do is feed old position fixes into the system. Dead Reckoning is nothing more than a guess at where you are, based on where you thought you were, and where it seemed you were heading then. Errors accumulate, and ships drift off to wreck without ever seeing where they really were. Auto manufacturers learned this over the pandemic — expecting a cataclysmic fall in demand, they cut orders for the parts they use in production, especially semiconductors. By the time they had updated to the government’s fiscal strategy, they were at the back of the line for those semiconductors. The result for the broader economy? An inflationary shortage from millions of missing vehicles.

Dead Reckoning can help, but if Dead Reckoning is your only strategy, your ship will need more help than your strategy can provide.

Worse still, the navigational problem we collectively face is bigger than any one ship. Your ship can only be one of hundreds of millions in the convoy of the US economy. However well-navigated, its trajectory will always be contained and shaped by the direction and drift of the convoy as a whole: everyone is heading somewhere. Wassily Leontief anticipated the automakers’ pandemic-era problems decades in advance:

The American economy is a gigantic, intricate machine. A serious malfunction of any one of its component parts affects, sometimes with a long delay, the workings of all the other parts. Decisions that are made and actions taken today will affect the life of everyone. Some of these changes might be felt only five, perhaps ten years, and even twenty years from now.

The real problem is that, despite all its gigantic, intricate complexity, the economic convoy has no leader. The government issues documents each month — employment reports, production figures, price indices, trade data — which share their measurements of the convoy’s boundaries and internal dynamics. Yet no one is responsible for fixing the convoy’s position, let alone tracking its trajectory. Without tracking, decisionmakers use simplistic heuristics — are inflation and unemployment too high, is growth too low, are exchange rates stable? — to make decisions about a tangled economy whose internal structure is never examined. Steering the convoy as a whole requires understanding how different sectors relate to one another domestically, and how each relates to the broader world of global trade.

The best record of the broader economy kept by most ships is Dead Reckoning — guesses about how things are built on earlier guesses about how things were. Have they and the people they know been doing better or worse? What do they hear on TV? How are their suppliers and customers doing? Have the prices they care about gone up? Individual ships react to the ships around them, and those reactions propagate across the convoy: price shocks during the pandemic cascaded from sector to sector as businesses and households adjusted to changes nearby. Now reports filter in suggesting danger ahead — climate crisis, inequality, loss of capacity — and that the convoy will need to change direction.

Most ships navigate by feeling, but even the best-navigated individual ships cannot steer a convoy that doesn’t know where it is.

The work of steering towards an affordable and democratic future can only begin with a shared understanding of where we actually are.

To avoid blunders and plan for a real future, someone must fix position for the convoy as a whole and begin keeping a record. That record can then be used to design the new maps necessary for directing renewed public investment — not by commanding every individual ship, but by charting a course the convoy can actually follow.

With this problem in view, Common Wealth US would like to announce the launch of Forces of Production: a monthly log of position fixes for the convoy, covering the supply side of the US economy.

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Each month we will explain what happened the month before based on the newest government data and some reactions from the press. We plan to survey the Producer Price Index, Employment Situation reports, Consumer Price Index, trade statistics, Industrial Production and Capacity Utilization figures, manufacturers’ surveys, and other hard and soft economic indicators to develop a holistic account of what has changed and where.

Every monthly entry will build on the one that came before. Our goal at Common Wealth is not only to keep a record of the economy, but to be able to show where our policy proposals fit into the economy that actually exists, and how better planning and coordination can be achieved. All attempts to change the economy — from industrial policy to macroeconomic management of the business cycle — must be based on an image of the actual forces, the actual capabilities and powers of the economy itself.

Forces of Production offers a record of where the economy has actually been, publishing on the second Monday of each month on data released in the previous month.

At Common Wealth US, we work to complete the climate transition while building toward a decommodified future and democratized. These are immense, existential goals: decarbonization will require us to restructure production at civilizational scale, decommodifying life’s essentials — housing, healthcare, childcare — will mean a fundamental reorganization of the service economy.

These transformations require coordination: the convoy as a whole must change direction in ways no market can organize and no individual actor can command. Though we cannot make a map of the future, we must make maps for the future.

Forces of Production is for those captains who would like the convoy to move beyond dead reckoning, to fix position and find its way in the growing dark. If we do not know where we are, coordination is impossible. But by fixing a trajectory and building a map, we can begin to understand the forces that move beneath us, to find which paths lead to safety and which to wreckage. At Forces of Production we work to start building the common reference point.