Does a legacy in manufacturing preclude a future in it?
We're trying to implement industrial policy without the industrial base, and that's a problem.
What can geography reveal about the frontier of manufacturing in America?
The first post in this series documented U.S. manufacturing’s stasis ever since the Great Recession of 2008 — low rates of job creation and job losses, low rates of job turnover, and low startup rates.
This post similarly peers under the surface of the sector to examine what geography and business dynamism, together, can tell us about the health of American manufacturing today.
The data paint the picture of new manufacturing activity — in the form of new establishments and new firms — avoiding hubs of established prowess and instead gravitating towards places with little history in manufacturing.
This tendency is not new. A fact of modern U.S. manufacturing appears to be that it trends towards deagglomeration.
What do these location choices reveal about the drivers of U.S. competitiveness today? Why is more manufacturing in an area associated with less manufacturing dynamism? And why does having a legacy in manufacturing seem to make it harder to build a future in it?
The answer to these questions might hold the key to American re-industrialization.
Deagglomeration nation
The total number of manufacturing firms nationwide fell slightly from 2020 to 2023, as it has consistently since about 1998.1 This decline was not pervasive, however. It was primarily due to the slow but steady hollowing out of the nation’s existing manufacturing hubs.
Nikhil Kalathil of Carnegie Mellon and coauthors developed a framework that classifies counties based on the nature of manufacturing sector agglomeration within them. Covering 1,800 counties with sufficiently sized manufacturing bases, the authors identify four different archetypes of agglomeration:2
High agglomeration areas where firms locate with both peers and suppliers
Peer (horizontal) agglomeration areas where firms locate with others in similar industries and similar positions in the supply chain
Supplier (vertical) agglomeration areas where firms locate within a particular supply chain
Low agglomeration areas where firms locate with few peers or suppliers
High agglomeration counties remain home to the bulk of the nation’s manufacturing firms and jobs, but they lost over 1,300 companies on net between 2020 and 2023. By contrast, low agglomeration (+424), peer (+38), and supplier (+74) agglomeration counties all added to their manufacturing bases on net.
In percentage terms, high agglomeration counties shed 0.7 percent of their manufacturing firms, while firm counts grew by 1 percent in low and peer agglomeration counties.3 Firm dynamics — the constant churn of openings and closings — are gradually pulling the sector’s center of gravity out of traditional hubs.
Economic Geography 101, revisited
At first glance, this trend towards deagglomeration is surprising because fundamental precepts of economic geography around industry clustering and agglomeration — from Marshall (1890) to Krugman (1992) — were forged in a goods-producing world.
In these canonical frameworks, firms co-locate to take advantage of information flows and knowledge spillovers, tap deep pools of specialized labor, reduce transportation costs, and build relationships.
Part of the magic of agglomeration is that it should spur dynamism by its very nature. Mash up a critical mass of complementary people and firms, thinkers and doers, innovators and imitators and they will unlock progress.
If expertise is an advantage and new commercial opportunities are more perceptible with proximity, you’d expect new businesses to start where an industry already has a presence, too.
In the economists’ jargon, agglomerations emerge because they offer firms increasing returns.
That is, until they don’t, at which point they start offering diminishing returns instead.
Diminishing returns can set in with size. As agglomerations grow, so do congestion costs, which include traffic and high prices of land and labor.
Diminishing returns can also set in with time. As firms and industries mature, they tend to seek out more generic and less specialized locations, as they rely less on innovation and agglomeration-based advantages to stay competitive and more on driving down costs of production.
Agglomerations may grow less dynamic over time, too, as a sort of spatial industrial sclerosis develops and winning firms eventually grow older and bigger, workforces age, technologies get locked in, vested interests accrue, and entrepreneurial vim fades.
A map of attrition
Manufacturing’s deagglomeration should be interpreted through this framework as a symptom of a sector that has lost its dynamism. The series of state-level scatterplots below show how decline and deagglomeration have proceeded together.
Each dot represents a state, sized by manufacturing’s share of the workforce. The y-axis represents the startup rate, or the share of all manufacturing firms in the state that started in the past year. The x-axis represents the death rate, or the share of all manufacturing firms that shuttered in the past year. Values are averaged for each decade. The 45-degree line represents balance, where each dying manufacturer is replaced by one new one. States above the line enjoy more manufacturing firm births than deaths; states below, the opposite.
The steady march of states below the 45 degree line shows how manufacturing has faded. The mainly vertical progression shows that American manufacturing has adjusted to economic change on the entry margin — that is to say that dynamism has fallen because the startup rate has collapsed while the rate of failing firms has remained largely unchanged. And the startup rate’s collapse has had a profound impact on the states in which manufacturing constitutes a bigger share of the economy (larger points in the graph) by pushing them more deeply into that attrition territory.
As a result, manufacturing is deagglomerating because the only places still experiencing net entry are those with less of a manufacturing base to start. The sector’s heartlands have lost the ability to launch more firms than they lose each year.
The finding holds for counties and at the establishment level too. Looking at even more recent QCEW data for the past three years, the number of new manufacturing establishments — which includes new firms and branch plants or new outposts of existing firms — increased by 4.3 percent in counties that had no specialization in the sector, compared to around 2 percent for counties moderately specialized in it and a decline of -0.1 percent for counties significantly specialized.4,5
We’ve become so familiar with new manufacturing establishments opening in empty fields that it’s easy to overlook the shocking revelation in these figures.
Places with large and diversified manufacturing bases appear to be less conducive to startups and less attractive to expanding firms than places that represent a blank slate.
On the one hand, this tendency might attest to the comparative strengths of new locations unsaddled by a legacy in the sector. But on the other hand, it signals that something has gone deeply wrong in our agglomerations.
But what is it? What mix of factors have conspired to send American manufacturing agglomerations-first into the dynamism doldrums?
The sector has been battered by automation, off-shoring, and foreign competition, of course. But local factors, and how places respond to economic shocks and technological change, matter too.
To see the future of manufacturing in America, we need to look beyond today’s companies and ask why new ones aren’t waiting in the wings. We need to look past surface-level decline and into the dynamics of resilience and renewal at the local level.
The stakes are high, because until we have a better understanding of what holds manufacturing back in the places that embody our national expertise in the sector, the country risks continuing down a quixotic and futile path of implementing industrial policy without the industrial base.
Searching for startups
If there’s one measure that best symbolizes renewal, it is startups. New firms with new technologies, products, or business models to replenish the stock of enterprises that inevitably thins through the course of economic churn and change.
Normalized by population, the country has only 1.5 young manufacturing firms per 10,000 people today — a figure that has been bumping along at all-time lows for 15 years and counting. Zooming out, that means for every 1 million Americans, there are only 150 manufacturing firms of any size or speciality that have launched within the past five years.
Bright spots
Those young firms, few as they may be, point to enduring advantages of making it in America, and they have helped bolster an embattled sector.
What is more, dozens of metropolitan areas are nurturing new manufacturers at much higher rates than the country overall.
These include:
Major metropolitan engines such as Los Angeles, CA, and Miami, FL.
Competitive manufacturing clusters such as Elkhart, IN, and Holland, MI
Mid-sized micropolitans like Cookeville, TN, and Somerset, PA
Emergent western production hubs such as Burley, ID, Evanston, WY, and St. George, UT
Mid-sized advanced technology centers such as Boulder, CO, and Burlington, VT.
Those bright spots point to a real competitive advantage that explain how the country remains a technological and, yes, a manufacturing superpower. But they remain the exception. Most major metros and historic manufacturing clusters track the nation.
Limited startup activity reigns along much of the East Coast, large stretches of the Southeast, and even midwestern metropolitan areas such as Columbus, OH, Indianapolis, IN, and Pittsburgh, PA, with world-beating research universities and longstanding efforts to integrate leading edge innovation into legacy manufacturing bases. Boomtowns such as Atlanta, Dallas, Nashville, and Phoenix trail the nation on spawning new manufacturers, too.
Los Angeles is a particularly interesting case study. Its manufacturing sector remains more entrepreneurial than most other major cities. The region is garnering renewed attention as it builds on its aerospace roots to become a center of defense-related “hard-tech.” Alumni from SpaceX and other firms are launching new manufacturing startups in the classic spinout process that makes strong clusters (greased, in this case, by California’s prohibition on noncompete agreements). Such entrepreneurial ferment is a key ingredient in dynamism.
Those advanced manufacturing startups attest to the area’s strengths in risk capital, know-how, and talent. They prove that the location itself still has the power to inspire entrepreneurship.
And yet, the number of young manufacturers in metro Los Angeles fell to its lowest level in decades in 2023.
This larger sectoral trend in the region attests to the area’s weaknesses, notably high costs across the board for both firms and workers.
What happens when congestion costs overpower the forces of agglomeration? People and businesses leave. Firms fail to start. The magnetic pull and inherent dynamism of a place like Los Angeles is dampened, leaving manufacturing in the nation’s second metro area smaller and less innovative than it could be.
Virtuous restoration
Los Angeles tells the national story. Metropolitan areas performing below their potential, summing up to a nation performing below its potential, too. Agglomerations past their prime and struggling to battle decay. Agglomerations that enervate rather than invigorate dynamism.
The spread of manufacturing itself is not inherently negative. The sector is an engine of economic development and opportunity for the communities into which it enters. Manufacturers have a long history of making location decisions to avoid having to compete with other firms for labor. Corners of the United States have real comparative advantages based on the costs of land, labor, and energy. New clusters may be forming in some of these low-agglomeration areas, too.
Deagglomeration is only a problem insofar as it is a symptom of the poor health of the nation’s manufacturing heartlands. That is exactly the diagnosis presented here.
Industrial policy now captivates both parties. The federal government has pledged trillions in subsidies to big firms to make it in America. The Trump administration has tried to fundamentally reset the terms of trade with tariffs. Entrepreneurship has been almost completely neglected. The low- to no-cost work of dismantling barriers to commercializing innovations and growing new firms has been largely ignored. Fundamental questions about how to strengthen U.S. competitiveness — and the regional foundations of U.S. competitiveness — remain unanswered.
To put it plainly: The nation will fail to activate a manufacturing renaissance without revitalizing innovation and entrepreneurship within its established agglomerations.
Luckily, there’s no shortage of ways to get started. Ban noncompete agreements so that nimble new firms can spin-out from lumbering old ones. Liberalize housing construction so that more talented people can afford to live in our most productive regions. Streamline regulations so that redeveloping brownfield sites can be cost- and time-competitive with building on greenfield ones.
And the best part of all is that local, state, and national leaders can all do their bit to make progress.
Geography and dynamism, together, help explain how manufacturing in America arrived in its current state. They also show how the sector can climb out of it.
This timeframe reflects the latest available data from Census’ Business Dynamics Statistics program, which provides the gold standard data on firm counts and starts by sector and place.
This map and analysis reports the average agglomeration intensity across all manufacturing industries located in a county. Agglomeration dynamics within an individual industry could look different, especially in highly specialized counties. For example, Ada County, ID, exhibits high peer agglomeration in the semiconductor manufacturing sector but low agglomeration overall. Unfortunately, business dynamics figures are not available subnationally below the two-digit NAICS code level.
Underscoring the point, completely uncategorized counties with too thin of a manufacturing base to classify added 240 manufacturing firms on net for a 2.4 percent growth rate.
Here, specialization is determined based on location quotients (LQs). An LQ equal to 1.0 means the same share of establishments are in manufacturing in the local economy as in the national economy. An LQ less than one means manufacturing is underrepresented and greater than 1.0 denotes specialization.
These gaps cannot be explained by differences in population growth, which is much more even across the categories depicted.
Thanks for this analysis. You raise good questions about locations, especially with regard to “redeveloping” old sites.
I do wonder why you denture the BLs BED data. It is far more current . And your citing gold standard BDS Firm data is wierd as your analysis is all based on establishment data at the county level. I am not saying that firm data is not useful. But your analysis is at estab level.
I suggest that you look next at land use. Open land is hard to find in totally developed urban counties. I live in Fairfax Va and there is limited available new space for large scale manufacturing with the usual ecological issues.
Next, as you know, the whole nature of manufacturing has changed since over the decades. Comparisons to the 1980s etc become less useful. Thus, again, the most recent BED might be the most useful data for both asking the questions and answering them.
Certainly it is well-known that the local labor force is the most dominant decision maker for businesses. As the nature of new many processes change so does the need for increasingly selective occupations. Look there for location decisions.