As manufacturers look ahead, the 2026 manufacturing outlook reflects an industry emerging from a difficult but instructive year. Economic uncertainty, shifting trade policies, and rising customer expectations impacted manufacturing operations throughout 2025. At the same time, investments in technology, workforce optimization, and smarter planning helped many manufacturers stabilize and prepare for what comes next. Understanding what defined 2025 and which economic drivers will shape 2026 is essential for manufacturers planning their next phase of operational efficiency and growth.
Manufacturing Operations in 2025: Challenges and Wins
2025 proved to be a tough year for manufacturing operations, with prolonged contraction across much of the sector. According to the Institute for Supply Management (ISM), U.S. manufacturing activity remained in decline for nine consecutive months through November 2025. Rising input costs, driven largely by tariffs and trade uncertainty, continued to pressure margins, with raw material prices increasing an average of 5.4% during the year. Many manufacturers delayed major capital expenditures and hiring decisions as they waited for greater clarity around economic and trade policy.
Despite these challenges, manufacturers showed resilience and adaptability. ISM data revealed that 86% of manufacturers planned to pass at least some tariff-related cost increases to customers, helping protect margins and sustain manufacturing operations. Capital expenditures rose approximately 3% in 2025, signaling that manufacturers continued investing in productivity, automation, and modernization even amid uncertainty. While overall growth was limited, these strategic adjustments helped position manufacturers for a more stable 2026.
Key Economic Drivers Shaping Manufacturing Operations in 2026
As manufacturers move into 2026, economic conditions are beginning to stabilize, but new pressures are emerging. Understanding the key economic drivers influencing the industry will be essential for aligning manufacturing operations with growth opportunities, cost controls, and long-term competitiveness. The following factors are expected to play the most significant role in shaping manufacturing performance in the year ahead.
1. Revenue Growth and Stabilizing Demand
Forecasts suggest a modest improvement in manufacturing demand in 2026. ISM’s Supply Chain Planning Forecast projects manufacturing revenues will increase by approximately 4.4% next year, with more than half of surveyed manufacturers expecting higher revenues than in 2025. Production capacity is also projected to expand, reflecting renewed confidence as trade uncertainty begins to settle. This stabilization gives manufacturers an opportunity to scale operations more strategically and invest in systems that support better forecasting and execution.
2. Tariffs, Trade Policy, and Supply Chain Agility
Tariffs remain a defining economic driver for manufacturing operations in 2026. ISM data shows that 32% of manufacturers plan to pass all tariff-related cost increases directly to customers, while another 42% will combine price increases with margin absorption. Only 36% of manufacturers are actively pursuing reshoring, with most opting instead to diversify suppliers or adjust pricing strategies. As trade policy continues to evolve, manufacturers will need flexible supply chains, accurate cost visibility, and agile operational planning to remain competitive.
3. Tax Incentives and Capital Investment Opportunities
Recent tax legislation is expected to influence manufacturing investment decisions in 2026. Provisions under the One Big Beautiful Bill Act permanently restored full expensing for research and development and capital equipment purchases, expanded interest deductions, and reinforced workforce tax credits. These incentives provide manufacturers with opportunities to reinvest savings into ERP technology, equipment upgrades, and process improvements, which directly support more efficient manufacturing operations.
4. Digitalization and AI-Driven Manufacturing Operations
4. Digitalization and AI-Driven Manufacturing OperationsDigital transformation continues to accelerate and remains one of the most impactful economic drivers shaping manufacturing operations. Rockwell Automation’s State of Smart Manufacturing Report found that 95% of manufacturing leaders have already invested or plan to invest in AI, machine learning, or generative AI technologies within the next five years. In 2025 alone, 50% of manufacturers invested in quality control improvements, 42% in process optimization, and 37% in robotics. These investments reflect a growing reliance on connected data, automation, and ERP-driven intelligence to improve speed, accuracy, and operational agility.
5. Workforce Optimization and Labor Costs
Labor remains a fixed and valuable asset for manufacturers, even as costs continue to rise. While hiring growth is expected to be modest in 2026, manufacturers are increasingly focused on using technology to reskill and upskill their existing workforce. Rather than replacing workers, many organizations are leveraging automation and ERP tools to reduce manual tasks and free employees to focus on higher-value activities. Workforce optimization will be a critical component of efficient manufacturing operations in the year ahead.
Conclusion
The 2026 manufacturing outlook indicates a year marked by cautious optimism, strategic investment, and continued adaptation. Economic drivers, including stabilizing demand, evolving trade policies, tax incentives, digital transformation, and workforce optimization, will shape how manufacturers plan and execute their manufacturing operations. Those who invest in connected systems, accurate data, and agile workflows will be best positioned to navigate complexity and capitalize on new opportunities.
At Friedman Corporation, our mission is to help manufacturers achieve efficient manufacturing operations and streamlined workflows. Through ERP solutions designed to support agility, compliance, and data-driven decision-making, we help our clients adapt to economic change with confidence. To learn more about Friedman and Frontier ERP for manufacturing, contact us today, and together we can build a strong foundation for sustainable growth in 2026 and beyond.
