Welcome and thank you for joining the newest installment

of our economic webinar series at Board.

My name is Natalie Gallagher.

I'm a principal economist

and the director of economic research here at Board.

And today I'm gonna take some time to walk you

through the trajectory of US manufacturing

in 2025 and 2026.

And to get us started, we're really gonna start with sort

of a, a state of the industry to see

what our jumping off point is.

Now, as you can see, industrial production

for manufacturing has grown about 0.8% year to date, um,

the purchasing managers index

that's currently sitting at 48.5.

Now anything below 50 indicates contraction.

So this tells us we're already in a bit

of a suboptimal position going into

the second half of the year.

And what we continue to see is that beneath the surface,

the dynamics driving the industrial production growth

or the manufacturing growth,

we are seeing it's actually quite uneven.

So the, the divergence across manufacturing categories

really mirrors the broader economic environment,

which is one marked by persistent inflation, um,

reaccelerating inflation like on the horizon below,

trend economic growth, and then tightening consumer budgets.

Now, interestingly, even essential categories, so

as you can see here, like food

and beverage are down year to date, which suggests

that households are sort of cutting back across the board

where they can possibly through substitution

or even reduced volume in some, in some cases.

Now, at the same time, we're seeing growth in more,

in more capital or industry linked segments such

as chemicals and electronics.

And this likely reflects ongoing investment in

infrastructure, in technology

and AI related projects rather than broad

based consumer strength.

Now, overall, this really paints a picture of a

fragmented sector where the growth

that we are seeing is very much linked more towards policy

and investment decisions, rather than, um, sort

of a resilient consumer base driving that sort

of final demand for manufacturing products in the us.

Now this, this really takes us into the trajectory

that we're forecasting for manufacturing as we make our way

through the second half of 2025 and into 2026.

So we,

we did see some early momentum in 2025 Q1 saw a growth

of about 1.3%.

Now that sort of faded in Q2

and we anticipate it to fade a bit more in Q3, coming down

to 0.4% growth than only a bit

of a modest pickup is expected in quarter four.

Now, unfortunately, it doesn't really get better than that.

In 2026, the outlook is even more subdued,

so it's actually mild contraction projective throughout the

year, particularly in the first half

before sort of leveling off to near

to near zero growth in the second half of the year.

So really stagnating.

Now, this trajectory sort of aligns

or it does align with our broader expectations

for weakening demand in the US economy

during the second half of the year.

Now in manufacturing,

that outlook is being reflected in weak output,

elevated input costs, and ongoing policy uncertainty.

So firms we're already seeing, they're sort of contending

with high inventories

and some sluggish freight volumes while consumers remain

under pressure from persistent inflation

and then some stagnating real income growth.

Now, although this is our trajectory for the consumer,

a really fair question might be, okay,

well what about businesses?

Right? Because there's sort of two sides of the coin

that could lead to a resurgence in demand

for manufacturing products and,

and lead to some, some more resiliency in 2025 and 2026.

Um, now what we do see

with real business investment though is I anticipated

to be quite subdued in the second quarter

and really throughout 2025.

So I bring this up

because we really don't see a avenue for, um,

for reaccelerating growth in US manufacturing in the second

half of the year or into 2026, which is why you have sort

of this subdued growth trajectory, um,

that we've just walked through.

Now, nowhere is sort

of this clear then when we look at the split

between non-durable and durable good manufacturing

because there is, there's quite a bit

of nuance going on under the hood when it comes

to the manufacturing trajectory for the US Now,

durables such as let's say machinery

and aircraft, they're a little bit more closely tied

to long-term business investments.

So in May we actually saw durable good orders surge over

20% year over year.

And that's, that's incredible, right?

And it was, um, led

by one-off large scale orders like aircraft.

Now that's sort of a positive sign,

but it doesn't tell us that structurally there's a lot of,

um, foundation for continued to lift throughout the year

and into 2026 as the economy as we're anticipating does sort

of soften in a broad based sense.

Now, alternatively, we have non durables,

which are comparatively they're more consumer driven

and they tell quite a different story than 20%

year over year growth.

In may. New orders were actually down 0.1% in May.

This really, um, is reflective of

consumer's more cautious approach to spending,

especially amid fears over reaccelerating inflation,

declining real incomes.

We see this sort of driving behavioral choices

and coming out in the consumer sentiment numbers.

Now, looking ahead, we do expect,

although we've had sort of this bump in durable goods

orders, um, we do expect this to plateau

as we make our way through the year.

We do anticipate that non-durable goods manufacturing is

going to be subdued with some, um, modest decline baked in

for the remainder of the year and into 2026.

Um, now with all of that sort of in mind,

we, we also need to touch on the policy landscape, right?

There's been a lot happening in the last several years,

last several months that is absolutely, um, anticipated

to impact the manufacturing sector in the us

and it, the impact it can have is, um, sort of widespread.

So to sort of get into that, we see, you know,

it wouldn't be fair if I didn't start with tariffs, right?

Tariffs are, um, they're gonna make things more expensive.

That's the, the highest critique, sort of the greatest, one

of the greatest critiques that tariffs sort of suffer from.

And, you know, the benefits benefits a few protected

sectors, so steel comes to mind,

but most manufacturers,

they do face higher costs without sort

of meaningful pricing power, right?

Especially as we're coming out

of a very high inflationary environment from, um,

20 21, 20 22, et cetera.

Now, at the same time, right,

we have tariffs making inputs more expensive.

The government is also incentivizing domestic investment

through tax policies.

Um, industrial subsidies, the one big beautiful bill act,

right, for example, locks in the 21% corporate rate allows a

hundred percent expensing on capital goods.

So all measures that really help manufacturers invest in

automation and equipment, even though there's sort of this,

um, labor shortage constraint where we see a mismatch,

a skills mismatch, um, within the manufacturing sector,

we currently have about 414,000 manufacturing jobs

unfilled, see some tighter visa policies,

maybe limiting short-term relief.

Um, but of course, well that's sort of

where we are right now.

We also have the new skills-based visa

and apprentice apprenticeship funding under the workforce

modernization executive order.

So that may help to sort of offset some

of these capacity constraints,

even though it's very likely in the short term, those

capacity bottlenecks, um, those capacity bottlenecks mean.

Now, finally, sort of the last thing I'll mention is that

consumers, right, the end market

for mini manufacturing products, they are, um,

absolutely under strained.

They're anticipated to continue to be unstrained.

Now this is, um, to a differing degree based on sort

of their income demographic,

but as we make our way through 2025, we also have a,

a monetary policy situation, which, um, is a,

is a maybe a bit tight in the short term.

We don't anticipate how to cut in July.

Um, we actually don't anticipate him to cut in 2025.

So really, unless we see some

re-acceleration in economic growth,

a meaningful deceleration in inflation

and really no substantial pickup from tariff induced price

pressures, which, um, it's very unlikely,

but would incentivize the Fed

or give them sort of the, um, the back,

the backing they needed to cut sort of

complete clarity when it comes to the tariff landscape

and a really optimal positioning for US manufacturing,

we're very unlikely to see a situation which will lead

to a meaningful rebound in US manufacturing.

Oh, now, in this environment, the, the best thing

that businesses can do is absolutely to stay agile, um,

make, make sense, the best course of action for you

as an industry leader within the chaos, right?

We're very likely to have economic volatility

for the next six months, 12 months, um, as we sort

of continue to make our way through,

through this economic landscape.

Now we have at, um, at Board to products

that are geared towards helping navigate

that economic uncertainty, Board Signals

and board foresight.

If you are interested in learning more about either

of those products

or if you would like to talk to an economist, then please go

to board.com and request a demo.

With that, I just wanna say thank you for your time.

As always, it was a privilege

and I will see you again next month.