Hello, my name is Matt Hillman, senior Economist at Board,

and today we'll be going over the US manufacturing Outlook

for 2026. To start, the manufacturing sector ended 2025 on a

bit of a weak note, and also sending us conflicting signals.

In December, the ISM manufacturing PMI fell to 47.9%,

the 10th consecutive month below 50% suggesting contraction

as well as it being the lowest level since October of 2024.

At the same time though, the s

and p global PMI suggested,

the manufacturing was actually an expansion with the value

of 51.8.

It's actually the fifth consecutive month that the s

and p global PMI was a six suggesting

expansion, so, which is right.

The issue is that they both are,

what we're seeing isn't a measurement problem,

but a sign of a two speed growth across

the manufacturing sector.

Before we explore this fragmentation further,

let's explain what's pushing manufacturing into contraction

in the first half of 2026.

First, an inventory correction is currently underway.

December's inventory index reading dropped sharply from 48.9

to 45.2 signaling that manufacturers are cutting production

to clear excess stock.

Second, the softening labor market is putting downward

pressure on consumer spending power

that's directly hitting manufacturer's production to demand.

Concurrently, tariff induced cost increases are putting

sustained pressure on margins as well as demand

as manufacturers experience the lagged effects

of tariffs working through our supply chains.

Furthermore, the uncertainty driven by tariffs,

including the potential overturning of many of them

by the Supreme Court imminently, has made long-term planning

for manufacturers incredibly difficult, contributing to more

cautious hiring and lower investment.

So what's the good news? These are

temporary adjustment factors.

Once inventory's correct in tariff effects stabilize in the

second half of 2026,

we'd expect manufacturing particularly in

durables to revamp.

Now, when we examine the manufacturing data,

a clear pattern emerges.

We're seeing a divergence between durable

and non-durable goods manufacturing.

In the third quarter of 2025, the last qua full quarter,

we have access to durable goods manufacturing output grew 3%

compared to year ago levels contrasted to non durables,

which only managed 0.9%.

In December, the ISM released their most recent report,

which paints a very similar picture

with only two sectors in the US manufacturing economy

reporting growth in that month.

Both sectors, unsurprisingly, are durables

and durables related to the ongoing AI expansion.

What this is telling us is not that we're dealing

with one manufacturing sector anymore, we're dealing

with two and two that are heading in different directions.

So why is this divergence happening?

The investment patterns tells us a bit of the story.

Durable goods manufacturing is investing heavily for growth.

We're seeing over $405 billion flowing into AI related

semiconductor manufacturing as well

as data center construction and industrial plant retooling.

In fact, 80% of manufacturers predominantly in durables

are planning to put at least 20%

of their improvement budgets this year into smart

manufacturing initiatives to streamline production flows.

To contrast this with non durables,

these manufacturers face more direct consumer exposure

during a period of weakening demand and elevated costs.

These are compressing margins

and shifting their focus from expansion to cost management.

So what does this mean In 2026, while high inventories

and tariff pressures will weigh on manufacturing more

broadly, the real story has to do with the divergence

between durable and non-durable goods manufacturing.

Durable goods manufacturing is positioned

to outperform non-durable goods driven predominantly

by AI related demand and smart manufacturing initiatives.

While non-durable goods face a structurally more challenging

environment as they're exposed to weak consumer demand,

elevated costs, and federal spending cuts.

The bottom line is though we have

to stop thinking about the manufacturing sector

as one homogenous sector

success in 2026 relies on sub-sector specific strategies

that recognize the divergent growth paths of these sectors.