As our readers know, we have been monitoring the manufacturing sector closely over the past several years as it has navigated a prolonged period of uncertainty, shaped first by the election cycle and later by shifts in trade and tariff policy.[1] Even before the recent improvement in regional manufacturing survey data, producers were cautious, holding back on new investment, hiring, and inventory rebuilding.
The latest ISM Manufacturing report for October offered a reminder that the sector’s recovery remains fragile. The headline index fell to 48.7 (figures below 50 imply contraction), undershooting expectations and extending the contraction streak to eight months. Weaknesses in new orders and production were compounded by a renewed drop in employment, with the subindex falling to 45.5. Employment in manufacturing peaked in early 2023 at just under 12.9 million workers and has since declined by nearly 200,000, reflecting a sector that has held steady but not expanded. The hesitation was not purely cyclical but reflected the difficulty of making long-term decisions when the policy landscape was unstable.
Throughout the 2024 election season, manufacturers faced a wide range of possible outcomes for taxes, energy policy, and reshoring incentives. The sharp contrast between competing policy platforms introduced a rare degree of planning uncertainty for capital-intensive industries.[2] Surveys from several Federal Reserve districts confirmed that firms were delaying equipment purchases and scaling back production plans until there was greater clarity. The challenge was less about demand and more about planning under uncertainty—forecasting the cost environment, regulatory burden, and access to foreign markets in the years ahead.
After the election, new tariff announcements and trade adjustments added another layer of hesitation. The prospect of higher duties on metals, semiconductors, and industrial components created fresh risks for manufacturers already coping with supply-chain disruptions. Many firms shifted sourcing arrangements or postponed new capacity projects while they assessed the evolving trade environment. Beige Book reports throughout late 2024 and early 2025 reflected this caution, describing lean inventories and restrained hiring across much of the country.
As shown in the Exhibit below, our Regional Fed Manufacturing Composite has been improving steadily since mid-2025 (in contrast to the ISM survey), moving from deeply negative readings earlier in the year toward levels that suggest the sector may be stabilizing. The shift has been gradual but notable for its consistency after more than two years of contractionary signals across regional Federal Reserve manufacturing surveys. The relationship between this composite and private capital expenditures, excluding defense and aircraft, has historically served as a reliable indicator of turning points in the industrial cycle. Both series have now turned positive on a year-over-year basis, hinting at a potential inflection.
One area that may be underpinning this resilience is the growing wave of data center investment. Across several Federal Reserve districts, new construction tied to large-scale computing infrastructure has absorbed skilled labor and driven demand for manufactured inputs ranging from electrical equipment and fabricated metals to HVAC systems and control components. While not a traditional source of cyclical momentum for manufacturing, this capital spending surge could provide a partial offset to weakness in more interest-sensitive segments such as consumer durables and housing-related goods.
If these trends continue, the next phase of the manufacturing cycle may be defined less by broad-based recovery and more by selective strength tied to infrastructure, technology, and energy-related investment. That pattern would be consistent with prior late-cycle transitions, in which high-value industrial demand leads overall output higher before consumer spending or export volumes fully recover. For investors, this implies that leadership within the industrial complex may narrow to companies positioned along these capital spending channels, while more consumer-oriented manufacturers could continue to face soft orders and margin pressure. As the monetary policy environment continues to move toward easing and business confidence improves, the balance may begin to shift from defensive positioning toward selective cyclical exposure. For now, however, the evidence still points to a market where precision, not breadth, will define performance.
As always, stay tuned.
Ardavan Mobasheri
Chief Economist
Exhibit: Manufacturing recession: Lights at the end of the tunnel?
Source: ICG Advisors, U.S. Department of Commerce
[1] – ICG Advisors. “Manufacturing recession” ICG Advisors Insights, 2025 https://icgadvisors.com/insights/icg-economic-commentary/
[2] – ICG Advisors. “Presidential Economics, Part 2.” ICG Advisors Economic Commentary Series, May 2025. https://icgadvisors.com/wp-content/uploads/2025/05/ICG_Commentary_Presidential_Economics_Part2.pdf