According to the Institute of Supply Management’s (ISM) Purchasing Manager Index, the U.S. manufacturing sector has been in contraction territory for 34 of the past 36 months, including the past eight months.
But this does not mean all of U.S. manufacturing is currently in contraction. In fact, different subsectors sit at different points in the business cycle, with some expanding and even peaking, while others are contracting or have reached the trough of their cycle.
According to analysis from Manufacturers Alliance and Oxford Economics, the manufacturing sector as a whole is slowly moving out of an economic trough and back into an expansionary phase. In addition, the oil and gas and the utilities sectors are nearing the peak in their business cycles, and the construction sector has now moved into a contraction phase.
What’s Propelling the Industry?
There are underlying factors for these business conditions. Among the key sectors propelling manufacturing back into a recovery phase are pharmaceuticals, aerospace, electrical equipment and fertilizer and agricultural chemicals, all of which are in expansion mode.
On the other hand, key industries such as basic chemicals, motor vehicles, food and beverage and petroleum refinery are at or near the trough of their contraction phase.
In addition, primary metals such as steel manufacturing—which is moving into expansion territory—are benefitting from downstream demand, including motor vehicles and aerospace. But costs remain high for primary metals and have constrained growth in sectors with weaker demand from such subsectors as industrial machinery.
Where Are the Weaknesses?
As noted above, manufacturing has several important downstream customer sectors that we track. The construction sector has been challenged by higher interest rates, slower labor supply growth and an increased cost of materials, which has a direct impact on demand for related machinery. Therefore, as construction moves into contraction territory, demand for construction machinery—which is currently at the peak of its expansion—will start feeling the brunt. Construction will approach the end of a multi-year decline in 2026 and begin its recovery in the second half of the year, aided by spending for new facilities for manufacturing and power generation. Weakness in agriculture and mining also contributes to slower demand for the specialized machinery used by these sectors.
As for six months down the road for several subsectors, weaker spending on equipment and industrial production is expected to start the year. Q1 2026 demand for machinery and non-durable products will decline, pushing their movement on the graph into contraction, while high-value industries like semiconductors and pharmaceuticals will continue to lead total manufacturing growth.
As part of its mission to help U.S. manufacturers become more strategic and competitive, Manufacturers Alliance teams up with Oxford Economics to provide a quarterly snapshot of where more than two dozen manufacturing subsectors presently stand in the business cycle, and where four full sectors – manufacturing, utilities, oil and gas, and construction – currently stand as well.
In these quarterly reviews, Oxford Economics also presents a forecast of where they believe the subsectors and sectors will be in half a year. The third quarter snapshot for 2025 (with data only through August, due to the government shutdown) can be found here.