ISM® Reports Economic Improvement to Continue in 2026

2025 Fall ISM Supply Chain Planning Forecast

The 2025 Fall ISM Supply Chain Planning Forecast makes manufacturing the clearest test of whether the broader economy can truly regain momentum in 2026. After contracting in November for the ninth consecutive month, U.S. manufacturing remains in a prolonged downturn. That context matters. Executives are not forecasting a snap-back or a sudden surge in demand. Instead, they see 2026 as a year of gradual stabilization and selective improvement, with the most meaningful gains expected later in the year.

Even amid contraction, manufacturers did not stand still in 2025. Operating rates rose to 82.4%, a sign that production has become more consistent despite soft demand. At the same time, production capacity increased 2.8% in 2025, and manufacturers expect a much larger 5.2% increase in production capacity in 2026. That expansion is notable given the recent slowdown. It suggests manufacturers believe demand will recover enough to justify added capacity, even if utilization remains uneven early in the year.

Capital investment trends reinforce that expectation. Capital expenditure rose 3.5% in 2025 and is projected to increase by another 3% in 2026. Rather than building new plants or adding large amounts of fixed capacity, manufacturers are focusing on spending on automation, equipment upgrades, digital tools, and process improvements. The emphasis is clearly on resilience and productivity, not aggressive expansion. Manufacturers appear to be positioning themselves to respond quickly when demand improves, without taking on excessive risk.

Labor strategy reflects that same cautious approach. Manufacturing employment declined in 2025, and while a recovery is expected, it is modest. Employment is forecast to increase by just 0.4 percentage points in 2026. At the same time, labor and benefits costs are expected to rise 2.5%, keeping pressure on operating margins. Rather than hiring aggressively, manufacturers are counting on productivity gains to support higher output. This aligns with broader trends toward automation and leaner operations, especially in an environment where skilled labor remains difficult to find.

Costs continue to be one of the most persistent challenges. Prices paid rose 5.4% in 2025, reflecting elevated inflation across raw materials and inputs. While some easing is expected, overall prices are still projected to increase 4.4% in 2026, meaning cost pressure remains a core planning concern. With customer pricing power still inconsistent across industries, many manufacturers are focusing on tighter cost controls, supplier negotiations, and sourcing strategies rather than relying on price increases to protect margins.

Inventory and supply chain planning also signal a shift in mindset. Manufacturers expect inventories to move modestly higher, suggesting the aggressive destocking that defined much of the downturn is giving way to more balanced inventory positions. At the same time, manufacturers remain wary of overcommitting, given demand uncertainty and lingering volatility. The approach is measured: enough inventory to support improved production, but not so much that working capital or storage costs become a burden.

Trade conditions are expected to remain steady rather than transformational. U.S. imports are forecast to stay about the same in 2026, and the U.S. dollar is expected to strengthen against two of the seven major trading partners. This contributes to incremental improvement in some export relationships, but no broad-based boost from global trade. For many manufacturers, domestic demand remains the primary driver of recovery, while tariffs and trade policy uncertainty continue to cloud long-term planning.

Revenue expectations reflect this mix of progress and caution. Manufacturing revenues increased 2.5% in 2025, and executives forecast a stronger 4.4% increase in 2026. Most manufacturing industries expect growth, indicating that improvement is not limited to just a few pockets of the sector. Still, confidence remains fragile. Forty-four percent of manufacturing supply managers believe 2026 could be worse than 2025, a reminder that after a long contraction, optimism is tempered by experience.

Taken together, the manufacturing outlook in the 2025 Fall ISM Supply Chain Planning Forecast is pragmatic and grounded. Capacity is expanding, capital investment is continuing, and productivity is improving, all of which suggest manufacturers are laying the foundation for recovery. At the same time, elevated costs, modest hiring plans, trade uncertainty, and uneven demand keep expectations in check.

For manufacturing leaders, the message is clear. 2026 is expected to be better than 2025, but not easy. The opportunity lies in being ready when demand strengthens. The risk lies in cost pressure and delayed recovery. Success will depend less on rapid growth and more on disciplined execution, operational flexibility, and the ability to turn incremental improvements into sustainable momentum.