The U.S. manufacturing sector closed out 2025 with a mixed report card, as the S&P Global Manufacturing PMI registered 51.8 in December—down from 52.2 in November and marking the weakest expansion during the current five-month growth phase. While any reading above 50 indicates expansion, the deceleration highlights the crosscurrents facing American industry as trade policy uncertainty persists.

Key Findings from the December Report

The manufacturing survey revealed several concerning trends that suggest factory momentum may be fading:

  • New orders declined: For the first time in 12 months, new business fell, signaling potential weakness ahead
  • Export orders fell: The seventh consecutive monthly decline in export orders reflects ongoing trade frictions
  • Employment rose: Manufacturers continued hiring to fill vacancies, suggesting confidence in 2026 conditions
  • Input costs eased: Inflation for raw materials hit an 11-month low, though remained elevated by historical standards
  • Business confidence deteriorated: Future expectations weakened on softer order inflows and tariff uncertainty

The Tariff Shadow Over Manufacturing

The manufacturing sector has been particularly exposed to trade policy volatility throughout 2025. President Trump's on-again, off-again tariff announcements have created planning challenges for companies dependent on imported materials and global supply chains.

While the recent suspension of new European tariffs following the Greenland framework agreement provided some relief, manufacturers remain cautious:

"Although consumers' worries about tariffs appear to be gradually receding, manufacturers continue to face uncertainty about import costs and export access. This hesitancy is showing up in order books and investment decisions."

— Manufacturing sector analysis

Export Weakness Persists

The seven-month streak of declining export orders underscores how trade frictions have affected American competitiveness abroad. Key export challenges include:

  • Retaliatory measures: Trading partners have imposed counter-tariffs on U.S. goods
  • Dollar strength: A strong U.S. dollar has made American exports more expensive in foreign markets
  • Global demand softness: Weak economic conditions in China and Europe have reduced appetite for imported goods
  • Supply chain reconfiguration: Global companies are diversifying away from U.S. suppliers amid policy uncertainty

Services Sector Provides Counterbalance

While manufacturing struggled, the services sector—which comprises the majority of U.S. economic activity—showed more resilience. The S&P Global US Services PMI registered above 54 in December, indicating solid expansion driven by:

  • Consumer spending: Continued strength in household consumption supported service providers
  • Business services: Professional and technical services maintained healthy demand
  • Healthcare: Medical services spending remained robust

However, the services report also showed upticks in input cost inflation, suggesting price pressures have not fully dissipated from the broader economy.

Composite Picture: Economy Still Growing

The S&P Global U.S. Composite PMI—which combines both manufacturing and services—registered 53.0 in December, a 6-month low but still indicating expansion. This reading is broadly consistent with GDP growth continuing at a moderate pace.

Global Context

The J.P. Morgan Global PMI Composite Output Index posted 52.0 in December, down from 52.7 in November—the lowest in six months and below the long-run average. This global slowdown creates a challenging backdrop for U.S. exporters even as domestic demand remains relatively healthy.

The December global PMI is consistent with worldwide GDP growth of approximately 2.4% annualized, below the 3.1% average observed in the pre-pandemic decade.

What This Means for the Fed

The manufacturing weakness adds a complicating factor to the Federal Reserve's policy calculus:

  • Inflation vs. growth: The Fed must balance still-elevated core inflation against signs of manufacturing softness
  • Employment focus: Continued manufacturing hiring suggests labor markets remain tight
  • Data dependence: Fed officials will watch January PMI data closely for signs of stabilization or further weakness

The manufacturing sector's contribution to overall GDP is relatively small—roughly 11%—but it serves as an important leading indicator for business investment and global trade trends that affect the broader economy.

2026 Manufacturing Outlook

Several factors will shape manufacturing performance in the year ahead:

Potential Tailwinds

  • Infrastructure spending: Federal infrastructure programs should support demand for construction-related manufacturing
  • Reshoring trends: Companies bringing production back to the U.S. could boost domestic manufacturing
  • AI and automation: Investment in productivity-enhancing technology remains strong
  • Energy costs: Lower natural gas prices benefit energy-intensive manufacturers

Potential Headwinds

  • Trade policy uncertainty: Ongoing tariff threats could continue dampening investment
  • Interest rates: Elevated borrowing costs make capital investments more expensive
  • Global weakness: Soft demand from China and Europe limits export opportunities
  • Labor costs: Wage pressures continue as manufacturers compete for workers

Investment Implications

The mixed manufacturing picture has implications for sector allocation:

  • Industrial stocks: May face headwinds until trade policy clarity emerges
  • Domestic-focused manufacturers: Companies less dependent on exports may outperform
  • Automation providers: Firms selling productivity solutions could benefit as manufacturers seek efficiency gains
  • Raw materials: Easing input costs suggest commodity pressures are moderating

The January flash PMI data—scheduled for release later this week—will provide the first reading on whether the December softness was a one-time dip or the start of a more sustained manufacturing slowdown. For now, the sector remains in expansion territory, but the margin for error has narrowed as trade uncertainty continues to weigh on America's factories.