Advice
A More Manageable Type of Noise
Forecasting beyond a week or a month has become increasingly difficult in today’s rapid-fire news cycle. On any given day we’re confronted with shifting tariff headlines, volatility in AI developments such as “DeepSeek,” evolving Federal Reserve rate policies, and market concentration driven by the “Magnificent 7.” Add to that fluctuations in precious-metal prices and a weakening dollar, and it’s clear the environment is loud—but not directionless.
Amid this noise, the structure of the U.S. economy remains stable. Services represent roughly 80% of activity and manufacturing about 20%. The 10-year trendline of these sectors—shown in the accompanying chart—illustrates how they typically move in tandem. Since late 2022, services have continued to expand while manufacturing has remained slightly below the expansion threshold. This divergence sets the stage for 2026: a year in which services maintain momentum and manufacturing begins a slow but meaningful improvement.
Manufacturing in 2026: Stabilization, Slow Improvement, and Strategic Shifts
The expected manufacturing recovery will not be fast, but it will be foundational. Reshoring—bringing production back from overseas—is occurring, but structural constraints mean progress is gradual. Permitting timelines, skilled-labor shortages, supplier-network gaps, and global competition all act as friction points. Greater stability in tariffs and economic policy could accelerate the trend, but even modest policy clarity will help manufacturers plan more confidently.
One of the defining pressures on both services and manufacturing is the emerging challenge of power availability. Electricity demand from AI-driven data centers is growing far faster than new generation capacity. Regional evidence reinforces this tension: electric costs for Indiana businesses and consumers have risen 25–33% over the last five years, with commercial rates tracking or slightly outpacing residential rates. Residential customers have experienced larger bill increases due to higher fixed charges and pass-through riders—particularly in NIPSCO territory. These pressures strain margins for energy-intensive manufacturers and elevate the importance of power-management strategies.
At the same time, AI and automation offer manufacturers meaningful cost advantages. As shown in the chart from BlackRock, labor costs as a share of output have declined steeply since the early 2000s, with another substantial drop after 2020. This shift has supported manufacturers through the 2022–2025 slowdown and positions them to see significant profitability improvement as demand recovers.
The Road Ahead: Opportunity in the Midst of Change
The One Big Beautiful Bill (OBBB) provides meaningful tax support for U.S. manufacturers in 2026 by emphasizing accelerated deductions and incentives for domestic investment. Key benefits include the restoration of 100% bonus depreciation for qualifying equipment and machinery, allowing manufacturers to expense capital investments immediately and materially improve near‑term cash flow. The legislation also permits full expensing of domestic research and development costs, reversing prior‑law amortization requirements and supporting innovation, automation, and efficiency improvements across production processes. Combined with stable corporate tax rates and enhanced incentives for U.S.-based manufacturing and energy‑efficient facility upgrades, OBBB improves after‑tax returns on capital spending and strengthens the economic case for reshoring and capacity expansion.
Overall, 2026 is shaping up to be another solid year for the U.S. economy. Services will continue to lead, while manufacturers should see slow but steady improvement as inventories normalize, capital spending becomes more predictable, and new technologies enhance efficiency. For manufacturers, the environment remains challenging—but also rich with opportunity. Those who invest in automation, energy resilience, workforce development, and supply-chain diversification will be positioned to grow even in a high-volatility world.
In early 2025 I recalled Spencer Johnson’s classic Who Moved My Cheese?—a reminder that change is constant, and the companies that thrive are the ones that adapt quickly. The “cheese” has been moving again as AI reshapes labor needs, energy markets tighten, and global competition evolves. What hasn’t changed is manufacturers’ long history of resilience and innovation.
We look forward to partnering with you throughout 2026 and beyond as you navigate this evolving landscape.