Forget the “Doom & Gloom” in US Manufacturing

There’s a bit of a storm cloud hanging over the US economy — at least as far as the mainstream financial media is concerned.

The logic behind this perception is profoundly simple…

“Tariff Bad.”

And by the transitive property, “Tariff bad for economy.”

This isn’t entirely untrue. But as we’ve learned time and time again in Moneyball Economics, things aren’t quite so simple.

Let’s dive into today’s video for the full story:

Video transcript:

Welcome to Moneyball Economics.

I’m Andrew Zatlin, and today I’m wearing my Kyoto University T-shirt. Kyoto University is my alma mater. I was a research fellow at the Kyoto University Institute of Economic Research. It’s kind of a think tank that advises the Japanese government on economic policy.

And if you remember, I was there back in the late 80s, and that’s when Japan was a manufacturing powerhouse. And that’s why I’m wearing the t-shirt today because I want to talk about US manufacturing.

I want to talk about how 2026 is going to see phenomenal growth in the manufacturing space and not just there, also in services. I’ve been saying it for a while, but I’d like to share with you some data that comes from the Institute of Supply Management. It’s a monthly survey they do called the PMI or Purchasing Managers Index. This is a highly regarded economic series that comes out each month.

Essentially, the ISM goes out and they survey purchasing managers who are sitting in manufacturing companies and service companies. They look at a multitude of different economic data points.

They ask, “How are your new orders? How’s employment? How’s your production? How’s inventory?” They ask a series of questions that basically help to determine how much activity is underway in the US economy today, not months ago.

And in addition, whether the economy’s accelerating or decelerating, is it expanding or contracting, looking at each individual index. Again, highly regarded. It really does a great job of identifying what direction the economy is going in.

And to cut to the chase, in looking at the services, in looking at manufacturing, the US is poised for phenomenal growth, as I have been sharing. So I’d like to dive into this because as I said, it’s a survey. It’s not counting how many widgets are made and sold.

It’s looking at the experience out there that purchasing managers are having with their customers. And as a survey, the respondents don’t just check boxes. They also give some interesting anecdotal feedback. And I want to read that feedback to you. And I want to start with the manufacturing side of life. Now remember, US manufacturing has been struggling for the past year with tariffs. And so let’s take a look at what’s going on in so far as what the respondents are saying. I’m going to read three quotes.

First of all, the first quote is coming in from machinery, machinery, equipment, factories. So this is a great prism for understanding our factories expanding or contracting.

And here’s what they say…

It’s not good news.

“Continuing softness in the market with December orders below average and buyers reluctant to spend despite beneficial tax policies. Geopolitical tensions are fueling anti-American buyer sentiment.”

Now here’s one coming from the computer side of life:

Business conditions remain uncertain, customers are cautious, broad-based inflation continues. Well, “yeah, semiconductor chips are getting more and more expensive because of the demand.”

Now here’s the last one that I want to talk about because this one’s long, but it’s very interesting. It talks about how businesses dealt with 2025 and how they’re dealing with things in 2026:

“Business trends moving into 2026 feature many of the headwinds from the third and fourth quarters of 2025. The plane has steadied, but there continues to be uncertainty. Tariff impacts on our financial performance last year cannot be overstated. While other inflationary pressures continue to hit the business, tariffs and product costs play a large role. And this year, we’re going to continue a multi-country sourcing approach to manufacture and import product from more tariff-friendly countries outside of China. We’ve trimmed costs everywhere inside the business, including on labor and conferences.”

Now, what really is the same?

Number one, tariffs were and are a continuing problem that is driving them to do a bunch of things. Number one, it’s been hitting profitability. So obviously that makes companies cut staff, which is what we saw last year. And they’ve reduced spending on non-critical functions like going out to dinners or traveling to meet a customer as much or going to conferences.

Okay. That was last year.

This year they’re turning away from China, which is interesting. In fact, a lot of manufacturing companies in this survey reported going to Mexico and even onshoring a little bit. In addition, we’ve got international elements here where, yeah, okay, there’s some export situations that are not so rosy. We call it the anti-Americanism, but also the rest of the world’s similarly in a state of circling the airport, not yet growing.

So the manufacturing space is not doing well, and yet that’s the anecdotal feedback.

If you look at the numbers, the numbers tell a very different story. The numbers tell a story of massive expansion underway right now. So behind this doom and gloom for manufacturing, they reported that new orders surged.

Now, in this index, the index measures zero to a hundred where anything above 50 is expansion, anything below 50 is contraction. Well, guess what? Last month in January, new orders surged from the contractionary territory of about 47 to the massive expansionary territory of 57. Big surge. Orders are coming in. We got to start doing something. We got to start producing. Export orders.

Remember how there’s that anti-Americanism that’s driving down sales? Again, last month it went from the contracting 46 to the expansion 50 and even deployment’s up. But here’s the kicker. And this is one of the main drivers behind why I say manufacturing’s about to take off dramatically.

Customer orders collapsed to the lowest level in almost four years since June 2022.

They collapsed to 38. Now just to put that in perspective, because of various aspects of what’s been going on in the supply chain, the front running that took place in spring last year, so customers loaded up on inventories and they’ve been able to use those inventories for a while and not do new orders.

The uncertainty is Trump going to throw another tariff out there. A lot of customers now are running on fumes. They just don’t have a lot of inventory on the shelves. Last month, it reached a critical level. In June of 2022, inventories were low because manufacturing had taken off, but we still had some supply chain problems. Everyone was scrambling for inventory because demand was so high.

This is an artificially induced supply problem today. Customers have just said, “I’m not buying stuff because I don’t know what’s happening.” But they’ve now reached that critical point where they have to bulk up.

They have to run their business as demand returns and they don’t have inventory, you’re going to see factories go into a positive feedback loop. They’re going to grow.

So in other words, when we look at what the people who are out there managing the manufacturing space, they’re telling us right now that things, well, they’re not so rosy, but by gosh, the orders are coming in and customers are standing there on the precipice needing to buy more. What’s also interesting, this is the only time that the tariffs were reported in this survey.

See, when I look at the manufacturing responses, and when I look at what I’m going to share with you in the service side as well, tariffs are no longer the major issue. Last year, throughout the year, every month in this ISM report, tariffs were raised nonstop in every respondents. It’s no longer raised.

And that’s another critical issue because at this point, tariffs have been out there for a year.

Whatever impact they’ve had, they’ve had.

Prices are no longer rising because of tariffs if they did rise at all. And as a result, it’s no longer the boogeyman. Instead, it’s where’s the growth and when is the growth hitting? And that’s key. And by the way, everything’s super lean. As I shared with you, this company is reporting that they’ve cut their staff. They’ve cut all their spending. They’re not going to cut anymore.

Instead, they’re only going to grow. Let’s talk services now. Now, services are things like real estate, construction, insurance, and so forth. Let’s talk about what they found in their index. Three quotes again, this one coming from construction. There’s a pending surge in new capital investments of our customers. That’s growth, pending surge, specifically in data centers and combined cycle power and nuclear market sectors.

Expect significant business growth in 2026, both in the domestic, US, and globally. Here’s another one. The supply chain is steady. Prices are leveling off. And then third, and this is a key one for the retail side of life, because this is our proxy for consumer spending. Solid holiday performance across most units. January is even better. Consumers are still buying discretionary goods.

All right. Let me take a step back.

What I’m sharing with you again is what the purchasing managers who sit in companies ordering supplies, helping these companies address business activity. They’re reporting what’s going on. We’ve got two different types of reports.

We’ve got manufacturing doom and gloom, even though their numbers are really positive. And then we’ve got the service side really rosy. Here’s the key thing that you want to keep in mind. The service side is almost entirely domestic. It’s supporting US activity, whereas manufacturing, as you might have heard from some of the quotes, is global in nature.

We’re making stuff for US and our trading partner businesses. So as a result, globally, we know tariffs have been a problem. Globally, there are other local issues and slowdowns, and that is being reflected in this data. When we want to talk about the US economy specifically, everything is up and to the right and it’s going to accelerate.

One last point. In the quote that I shared with you that talked about how AI is creating data centers and nuclear power demand, bear in mind, this is another thing that’s going to be interesting as we move forward, because these are contract workers who are being called in to lay cement to build the roads.

A lot of them traditionally would be undocumented immigrants, and we just kicked three million of them out. There’s going to be competition for workers. And so you’re going to see a lot of the labor data coming out being super positive, indicating a tight labor market.

So if you’re thinking about interest rate cuts in your portfolio and things like that, I just don’t think it’s going to happen as much as the consensus expects it to happen because the labor market’s going to be tight, wage inflation’s going to take off, and in general, the economy’s going to be taking off. So I think we’ve got one more and we’re done. Have a great weekend.

We’re in to win it.

Zatlin out.