Economic and labor challenges confront manufacturers

Manufacturing remains a cornerstone of the U.S. economy, contributing $2.93 trillion annually and employing over 13 million workers.¹ 

In 2025, manufacturers face a transformative landscape defined by economic changes, persistent supply chain challenges, rapid technological advancements and external pressures like climate change, shifting trade policies and geopolitical tensions. Adapting to these complexities takes careful planning. 

Economy: Inflation, rising costs and labor shortages

The economic landscape for manufacturers in 2025 is shaped by persistent inflation, rising production costs and labor shortages. The Producer Price Index (PPI) for final demand in the manufacturing sector rose by 3.3% in 2024, reflecting sustained cost increases for materials and components essential to production processes.²  

Workforce challenges remain a top concern for more than 65% of manufacturers, due to the industry’s rapid growth, upskilling required for new technology and the overall shortage of industry job applicants. The net need for new manufacturing workers is estimated at 3.8 million by 2033.³ 

In 2024, roughly 11% of U.S. manufacturing plants reported raw material shortages as a primary obstacle to capacity utilization, a marked increase from pre-2020 levels.⁴ Dependence on imports, particularly from China and the European Union, has left certain businesses vulnerable to fluctuating prices and supply constraints.  

To manage these challenges, manufacturers are focusing on cost efficiency and innovative strategies to adapt to shifting economic conditions. Investments in energy-efficient technologies and process optimization are ways to help mitigate rising input costs, while automation, upskilling and apprenticeships can help address labor shortages. Long-term resilience requires a careful balance between managing immediate financial pressures and pursuing sustainable growth strategies in an evolving global economy. 

Tariffs and trade uncertainty

Trade policy continues to be a moving target, and for manufacturers, the uncertainty around tariffs poses a growing risk to costs, sourcing strategies and long-term planning. Future changes to tariff policies could drive up the cost of imported raw materials, components and equipment, particularly for manufacturers who rely on globally distributed supply chains. Even the possibility of new tariffs can influence pricing models and vendor agreements, causing ripple effects across production schedules and inventory management.  

To help mitigate this volatility, manufacturers are revisiting supplier diversification strategies, considering nearshoring or reshoring, and closely monitoring geopolitical developments. Flexibility and scenario planning are key as tariff-driven disruptions could surface quickly and reshape competitive dynamics across sectors.  

Supply chain challenges and impacts

Supply chain resilience remains a critical focus for manufacturers as they navigate lingering disruptions and evolving global dynamics. Logistics networks continue to face challenges due to trade policy, labor shortages and shifting trade routes.  

Material shortages in critical sectors are prompting manufacturers to reconsider procurement strategies. U.S. companies have increasingly turned to options such as strategic stockpiling, nearshoring, reshoring and diversifying suppliers to help stabilize supply chains and reduce reliance on long-distance shipping. While these approaches offer long-term benefits, their implementation demands considerable upfront costs and careful planning. 

Emerging manufacturing technologies: Risks and opportunities

Innovation and advanced technologies have helped improve efficiency, reduce costs and maintain competitiveness. However, as connected systems expand, manufacturers face increasing cybersecurity risks, including threats to sensitive data, intellectual property and critical production systems. As the most-targeted industry for cyberattacks three years in a row, accounting for more than 25% of all security incidents,⁵ it is essential for manufacturers to stay informed about some of these key advancements shaping the sector:  

• Internet of Things (IoT)—IoT integrates machinery and data management systems to boost productivity and quality. Connected devices collect and transmit data to centralized systems, generating actionable insights. This helps manufacturers streamline processes, identify operational inefficiencies and improve decision-making. 

• Artificial Intelligence (AI)—AI enhances manufacturing through applications like machine learning and deep learning neural networks. Key uses include improving demand forecasting and predictive maintenance, which analyzes sensor data to forecast equipment failures, optimize repair schedules and reduce downtime.  

• Smart factories— Smart factories are advanced manufacturing sites that extensively use automation and interconnected devices to enhance productivity and operational precision. These facilities leverage real-time data from machines to help operators, engineers and supervisors identify inefficiencies, anticipate maintenance needs and adjust workflows dynamically, minimizing disruptions.  

The global smart factory market is projected to grow to $325 billion by 2032, reflecting the increasing adoption of these technologies.⁶ The implementation of these automation technologies may help compensate for talent shortages and enhance the efficiency of sales processes to reduce lead times.  

• Digital twins— A digital twin is a virtual replica model created in simulation software, with the same characteristics as its physical counterpart, allowing for extensive testing under various conditions within the simulation. This approach reduces reliance on physical prototypes, accelerates development and cuts costs associated with testing new products. 

With all the advancements, the rise of smart factories and AI-driven systems has also made manufacturers prime targets for cyberattacks, increase cybersecurity risks. Implementing multi-layered security strategies — such as firewalls, network segmentation, AI-driven threat detection and comprehensive employee training — is essential to protecting interconnected data, intellectual property and systems from evolving threats. Balancing innovation with strong security measures will be key to ensuring long-term resilience in an increasingly digital landscape. 

External factors: Climate change, sustainability and global tensions

The manufacturing sector faces growing pressures from external forces, including intensifying climate change impacts, stricter global sustainability standards and escalating geopolitical tensions. These challenges are reshaping industry priorities and driving innovation across the sector. 

Sustainability remains a central focus as manufacturers align with global climate goals and consumer expectations. Circular economic principles, such as reusing materials, reducing waste and recycling, are helping companies minimize environmental impact while conserving resources and managing costs. Electrification, through a shift to electric-powered technologies like heat pumps and electric vehicles, further reduces emissions and enhances energy efficiency. However, this transition necessitates major investments in renewable energy infrastructure and grid upgrades to meet increasing demand. 

The adoption of renewable energy, including solar, wind, hydroelectric power and battery storage systems, is rapidly accelerating across the manufacturing sector. By decreasing reliance on traditional energy sources and leveraging economic incentives like tax credits, manufacturers are achieving both environmental and financial gains, ensuring long-term sustainability. 

Moving forward

To remain competitive in 2025, manufacturers must embrace emerging trends in technology and sustainability, strengthen supply chains and plan for policy shifts like tariffs. Agility, automation and proactive sourcing will be key to building long-term resilience in a rapidly evolving landscape. 

For additional resources on managing risks and enhancing operational efficiency in manufacturing, visit Nationwide’s Risk Management Solutions Center.