Why Manufacturing Matters

Welcome to This Week’s Leyendecker View

A man is a gregarious animal, and much more so in his mind than in his body. He may like to go alone for a walk, but he hates to stand alone in his opinions.
– George Santayana

FAVORITE READ OF THE WEEK

Who Are The Real Experts Now?
Social commentator Ted Gioia on Substack

THINKING OUT LOUD

Why Manufacturing Matters

The Japanese company Daikin has a 4-million-square-foot plant in Houston, TX that makes HVAC (heating-ventilation-air conditioning) systems. It’s the third largest manufacturing plant in the country. If we can build HVAC systems cost effectively in Houston, then why can’t we also build stoves, ovens, microwaves, washing machines, dryers, and who knows what other appliances cost effectively in the US? This Daikin plant proves that manufacturing can return to the United States. The facility employs between 8,000 to 10,000 workers.

Why does manufacturing matter? Because it has a very high economic multiplier.

Since the ratio of service providing to goods producing jobs shifted from 2.9 to 1 in 1985 to 6.3 to 1 today, our federal debt to GDP has gone from around 40% to around 120%. If a service-dominated jobs economy is fine, then why has our debt to GDP exploded?

My answer? It’s because goods producing jobs have a higher economic multiplier effect than do service providing jobs. A service economy simply doesn’t possess the same GDP growth potential. Why?

A finished good requires many steps before it becomes finished. The process always begins with mineral extraction (and agriculture) because every product has at its origin some kind of basic raw material. Your plastic toothbrush started with the extraction of oil and gas, which was turned into plastic, which was then made into a toothbrush.

Let’s count the resources and hands that are involved in the process of creating a finished good:

• First there is the equipment and labor needed to extract the raw materials, whether they are metals, hydrocarbons or agriculture products.
• Then there is the equipment and labor needed to transport those raw materials to a processing center.
• Then there is the equipment and labor needed to process those raw materials into an intermediate product (like plastic).
• Then there is the equipment and labor needed to transport those intermediate products to a finished goods maker.
• Then there is the equipment and labor needed to turn that intermediate product into a finished product.
• Then there is the equipment and labor needed to transport the finished product to a consumer or a commercial enterprise.

In addition, all of these steps require some sort of real estate to house the production equipment and/or to warehouse the intermediate and finished products. 

Just imagine how much “economy” is created in the goods producing world. Imagine all the equipment to obtain the raw materials, all the equipment to transport the raw materials to a processing facility, all of the equipment to process the raw materials, all the equipment to transport the intermediate goods to a finished goods producer, all the equipment to turn that intermediate good into a finished good that then can be sold.

But there’s more still. All of this equipment also started with some kind of raw material and then followed the whole manufacturing process to reach a finished product. And then imagine all of the labor needed in each of these processes; their wages are then turned into consumption.

Manufacturing is like a series of Russian dolls, where each nested doll is its own mini manufacturing industry with a large economic multiplier. Combine them all together, you get exponential economic growth.

Now take the service providing world.

At the end of the day, a service job is about the human time spent on providing that service. The wages of that service provider are certainly injected into the economy, but the economic multiplier of providing their service is tiny compared to the economic multiplier of goods production. 

It is true that service providers need equipment, but they are customers, not makers; by definition, this reduces their economic multiplier. Even more so if their equipment products were made outside of the US.

It is true that the inputs of goods production don’t all come from our country like may have been the case 100 or more years ago. Nonetheless, harnessing as much of the goods production economic multiplier effect as possible is a worthy goal, one that would likely catalyze much higher economic growth.

This is why it may be very important to build more manufacturing capacity in the US. Doing so would likely provide fuel to grow our economy faster, perhaps much faster, than we’ve been able to do since we shipped most manufacturing overseas, leaving the service sector to dominate our economy.

If Daikin has a 4-million-square-foot factory in Houston, then we should be able to productively and profitably manufacture all kinds of other appliances in the US.

THE RANDOMS

If the US expects to box out China from trade with the West, what sort of reaction can we expect from them? Should we remember that the last time Trump put tariffs on China, we got Covid?

From an investor friend of mine: “Markets hate genuine medicine but love financial painkillers—classic short-term thinking. What we’re seeing in the Treasury markets is exactly this dynamic playing out. Twenty years of kicking the can down the road on fiscal discipline has created structural imbalances that can’t be papered over anymore. The market tantrum we’re witnessing isn’t the problem. It’s the first honest price discovery we’ve had in years.”

From a conversation with a banker this week: “Private equity may be able to use the tariffs as a scapegoat for their inability to find worthwhile liquidity events.”

Seems pretty disingenuous for so many people on Wall Street clamoring about budget deficits and government debt growth also to be whining when the change needed to fix these things causes them to “lose” money. This is especially true since so much of the “gains” from financial assets the last 20 or more years resulted from budget deficits and government debt growth. 

Speaking of all the whining going on out there: Where’s that American spirit?

China wants us to treat them with respect. Okay, how about first admitting to stealing our IP and then paying us for it?

Iran’s economy is supposedly in so much trouble that they may very well strike a nuclear deal with Trump. That sounds great, but at what point in recent history have we been able to trust what Iran says it will do?

Does Trump announce tariffs and then backtrack on them as a way of telling US manufacturers overseas that they need to start coming home?

This WSJ article from last week, “The US and China are Going to Economic War, and Everyone Will Suffer,” reminded me of something my father drilled into my head: Suffering builds character.

In the debate between work-from-home and return-to-office, perhaps the solution is to prioritize family and then let the cards fall as they may.

ECONOMIC NEWS

Economy

Fed Chair uncertain what to do
Motor vehicles drive retail sales
How the US lost manufacturing prowess
The beauty salon recession indicator
Consumer sentiment plunges
But Houston remains most upbeat
Producer prices are (were?) deflating

Labor

Costco’s CEO started as a forklift driver
Top Hollywood agent started at the bottom

BUSINESS

Finance

Private equity goes risk off
Private equity in the perfect storm
Have banks made a big lending mistake?
High-yield bonds become junk again
Volatility makes big banks lots of money
BlackRock whines about easy money retreat
Blackstone plans to get average person’s $$$

Real Estate

Housing starts tumble
Overbuilt apartment market gets lucky
Ultra-luxury home market on shaky ground

Tech

Google is a monopolist
Japan has giant tech breakthrough
Apple moving assembly to India
9 rules for new technology—from 1987

AI

Open AI wants its own X
AI therapists are better than real ones
Nvidia takes hit to earnings

Energy Transition

Team Trump stops NY offshore wind
Trump targets state extortion laws
EIA expects more solar and higher power prices
Government Motors (GM) has a problem
The history of nuclear energy

THE NATION

The Washing-Tone

Tax hike on the rich may be coming
20,000 IRS workers want to resign
Good luck cutting government spending
Have Ivy Leagues been price fixing?
Trump wants to rebuild shipping

Tariffs

How companies track and pay tariffs
Automakers may get a break
China gives Boeing another problem
China says importers should cheat on tariffs
Brazil’s protectionist model works
Global factories in the cross hairs

The Tariff Effect

Tariffs are benefiting some small US companies
TSMC goes big in Phoenix
Nvidia to make supercomputers only in US
Tariffs could bring manufacturing home
US companies replace some Chinese products

Social Trends

Texas passes school choice law
Soda to be yanked from food stamps
Trump goes after Big Ed
Is a religious revival happening?

GEOPOLITICS

Global

China floods India with stuff
UK Supreme Court says trans women are not women
India has a consumer debt problem
Hockey trumps politics in Canada
McKinsey’s view of India’s potential
The UN thinks it should control shipping

Europe

The French go big on Catholicism
Germany’s make-or-break moment
Europe sits on fence between US and China
UK to save British Steel
UK wants and needs more coal

Ukraine

Stage is set for a Ukrainian minerals deal
US gives Russia an ultimatum
Russia goes on nationalism spree
Russia wants to buy Boeing jets
Russia keeps killing civilians
Don’t let Putin off easy, says Poland

Middle East

US articulates Syrian changes needed
Are the Chinese helping the Houthis?
Israel threatens Gaza escalation
Is Hamas broke?
US claims to stop Israel from bombing Iran
Witkoff tells Iran to stop nuclear enrichment
Israel and Turkey talk Syrian turkey

China

China halts rare earth exports
Is violence on the rise in China?
Xi purges a top general
China manipulates its currency to 18-year low

War Creep

5 signs US and China are going to war
Does the UK have a drone destroyer?
DeepSeek is a profound security threat
US troops headed to Panama Canal

MAKING A BETTER YOU

Mind
Get more quiet time.

Make your life happier and less complicated
How to minimize regret
Small tips to improve your brain

Body
Get more outside time.

A quick aging test
Is skipping a good workout?
Navy SEALs’ 10-minute sleep hack

FUN STUFF

Let your hair down, baby! Even if you’re all alone.

The Extraordinary

Baby colossal squid, filmed for first time, is magnificent
California got ripped off for $55B
There may really be another earth out there
The de-extinct dire wolves are real

Music That Found Us

Benson Boone’s “Beautiful Things.”
Fontaines D.C. Tiny Desk Concert
“The Dead Mouse One” by Father John Misty.

Worth a Watch

The Return of Odysseus trailer.
Wes Anderson brings us The Phoenician Scheme.
Go Britain, with The Ballad of Wallis Island.
Making cheese drama Holy Cow.

The Yum Yums
How about some canned tuna recipes?

Tuna patties, from my childhood.
Tuna mac and cheese with peas, from college.
Best tuna salad, for now.
The ultimate tuna melt
Top NYT Niçoise salad
Tuna and tomato salad

PARTING THOUGHTS

In dwelling, live close to the ground. In thinking, keep to the simple. In conflict, be fair and generous. In governing, don’t try to control. In work, do what you enjoy. In family life be completely present.
– Lao Tzu

IN CASE YOU MISSED IT

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April 11, 205

Bull in a China Shop
April 4, 2025