Hello, my name is Matt Hillman, Senior Economist at Board, and

for this month's economic outlook, we're going to be going over the US

manufacturing sector. At the beginning of this year, we expected US

manufacturing to trend broadly flat through 2026 due to several

economic headwinds it was facing, such as inventory buildup

due to tariff-induced front-loading, interest rates remaining

restrictive, tariff-related uncertainty, and consumer health

concerns. However, the first half results for

manufacturing have been stronger than expected.

May marked the strongest ISM manufacturing PMI reading in almost four

years. While the total industry figures are up, this is not

a uniform recovery, and upon a closer look, there's different economic

drivers and expectations acting on the sector.

One side of manufacturing is being supported by committed capital investment.

Another side looks strong in orders data, but the

underlying demand signal is less durable and more volatile.

That distinction is the central planning issue for manufacturers

going forward. This chart shows new orders for both core

manufacturing and consumer goods are up year over year.

Core manufacturing in this sense refers to capital-intensive business-to-business

categories such as those tied to AI infrastructure, data

centers, transportation equipment, and smart factory automization.

Consumer goods include categories such as food, beverages, household products,

apparel, and textiles.

At first glance,

that looks like broad-based demand recovery.

However, a more accurate interpretation is that those two lines are being driven

up by very different economic forces.

On the core side, companies are placing orders against multi-year

capital budgets. The manufacturing investment cycle tied to AI

infrastructure and advanced computing has moved close to

$1.8 trillion in announced commitments since the start of

2025, including very large programs from Apple,

Micron, IBM, TSMC,

and others.

On the consumer side,

new orders growth should be approached with much more caution.

The numbers are up, but the driver behind it is not

necessarily strong household demand.

To see the difference, we need to look from new orders to

backlogs. For core manufacturing, new orders are translating into

unfilled orders and longer lead times.

Electronic components and semiconductors remain in short supply.

Capital expenditure lead times are still measured in months, and consumers are

effectively waiting

for capacity.

That is what real capacity-constrained demand looks like.

The problem is less about finding demand and more about fulfilling it

reliably. On the consumer goods side, the pattern

is much different. New orders are up, but backlog formation is

much weaker.

The pattern is more consistent with defensive procurement,

manufacturers buying ahead of input price increases and supply chain

disruptions rather than actual consumer-driven demand for their products.

That is a practical risk. The new order book can look healthy

while the channel is being filled by inventory decisions rather than

customer pull-through.

For consumer-linked manufacturers, that is the difference between

planning for growth and planning for inventory risk.

The reason we're not seeing the same follow-through on the consumer side than the

B2B side is that the consumer environment is under pressure from

several directions. The top three of which being, first, energy

prices. The Strait of Hormuz closure earlier this year led to a

sharp oil price shock that is trickling directly into

increased household transportation costs and energy costs.

Second being labor.

The June jobs report showed slowing job growth while unemployment remained

steady at 4.2%. The broader signal here is

that hiring momentum is not accelerating.

And lastly, wages.

The Atlanta Fed wage growth tracker moved lower in May, and wage

growth for job stayers dropped sharply.

The premium for switching jobs has narrowed, and that

is signaling that workers' bargaining power is beginning to cool.

For planners, the issue is not an isolated headwind.

It is a combination of several different issues.

A softer consumer pull-through, higher input cost uncertainty, and less

margin flexibility. At the same time, manufacturers are still looking to

buy ahead. Putting it all together, the headline is that

manufacturing in the US as a whole is stronger than we expected in

January. But beneath that headline, the sector is split.

Core manufacturing is supported by real capital investment and constrained

capacity,

while consumer-linked manufacturing is dealing with order strength that likely

reflects defensive procurement more than durable end-use demand.

That leads to three planning priorities for manufacturers this quarter.

First being pressure test your inventories.

Run a scenario where input costs normalize faster than expected,

but consumer demand does not. In that case, the risk shifts from

not having enough supply to carrying too much inventory at the wrong

cost basis.

Second, review supplier concentration.

The firms that managed prior supply shocks well were those that

had already diversified their supply chains.

This is the moment to recheck that discipline.

Third, make scenario forecasting a more frequent part of your planning

cycle, not just a part of annual supply planning.

The range of outcomes in this economic environment are becoming too wide for

one baseline scenario to make full decisions off of

throughout the year. The firms that invest in planning capability will be

better positioned to protect margins throughout the second half of this year.

Thank you.