Economic Insights

Manufacturing Leaders Looking Beyond Today’s Volatility

Manufacturing CEOs became modestly more optimistic in May, even as they continue to navigate inflation, geopolitical instability, supply chain concerns, and pricing uncertainty. Current conditions remain only average by historical standards, but confidence in the year ahead improved, suggesting manufacturers increasingly believe the worst of the recent turbulence will pass.

• Current Conditions: Held steady at 5.5/10, reflecting continued operational and economic uncertainty.
• Future Outlook: Improved to 6.0/10, approximately 9% higher than views of current conditions.
• Business Conditions: 52% expect conditions to improve over the next 12 months.
• Capital Investment: Approximately 50% of manufacturing CEOs expect to increase capital expenditures, signaling continued willingness to invest despite economic uncertainty.
• Demand Drivers: Technology, data center, consumer products, aerospace, and defense markets continue to support investment activity.
• Key Risks: Inflation, supply chain disruption, energy costs, and geopolitical instability remain primary concerns.

Manufacturing PMI Reaches Four-Year High

U.S. manufacturing continued its recovery in May, with the ISM Manufacturing PMI increasing to its highest level in four years (since May 2022), rising from 52.7 to 54.0, the fifth consecutive month of expansion. Growth was driven by strengthening demand, accelerating new orders, and continued production increases. While pricing pressures remain elevated and supply chain concerns have resurfaced, the overall report suggests manufacturing momentum continues to build.

• New Orders: Rose to 56.8, indicating accelerating customer demand and the fifth consecutive month of expansion.
• Production: Continued expansion as manufacturers worked to meet increasing order volumes.
• Backlog of Orders: Returned to growth, suggesting future production activity remains supported.
• Employment: Improved but remained below the expansion threshold, indicating manufacturers are still cautious about hiring.
• Prices: Remained elevated at 82.1, though slightly below April’s four-year high, reflecting continued inflationary pressure on materials and energy.
• Supply Chains: Delivery times lengthened as firms managed growing demand and concerns about supply continuity.

OUR KEY TAKEAWAYS

Manufacturing sentiment and activity are moving in the same direction. Manufacturing CEOs became more optimistic in May while the ISM Manufacturing PMI reached its highest level since 2022. Together, these indicators suggest industrial markets are gaining momentum rather than merely stabilizing.

Customers appear increasingly willing to invest. Approximately half of manufacturing CEOs expect to increase capital spending, reflecting growing confidence in long-term growth opportunities despite continued economic and geopolitical uncertainty.

Demand remains healthy and is broadening. Strong new orders, rising production, and expanding backlogs indicate demand is extending beyond a handful of hot sectors. Technology, data centers, aerospace, defense, consumer products, and modernization initiatives continue to support investment activity.

Execution is replacing hesitation. The economic conversation is gradually shifting from “Should we invest?” to “How do we execute successfully?” Customers remain focused on ROI and risk management, but the data increasingly suggests projects are moving from planning into implementation.

Labor challenges continue to support automation and digitalization. Manufacturers remain cautious about expanding headcount, reinforcing the need for productivity improvements, workforce enablement, and operational efficiency through technology investments.

The outlook remains constructive despite ongoing risks. Inflation, supply chain pressures, energy costs, and geopolitical uncertainty remain concerns, but current indicators point toward continued industrial expansion and a healthier project environment for system integrators through the remainder of 2026.

AI Data Center Effect – Keep in mind that some of the strength reflected in current economic indicators is being driven by unprecedented investment in AI and data center infrastructure. While this activity is contributing positively to industrial demand, its benefits are not evenly distributed across all system integrators, industries, or geographies.

OUR KEY TAKEAWAYS

Leading indicators continue to support industrial expansion.
UNXANO remains firmly positive, with both long-term (12–12) and short-term (3–12) rates of change continuing to improve. The 12-month trend increased to +5%, while short-term momentum accelerated to +9%, indicating that recent economic activity is running meaningfully above the longer-term trend. Combined with improving manufacturing sentiment and expanding PMI readings, the data suggests industrial markets have moved beyond stabilization and into a period of sustained expansion.

Momentum is strengthening across multiple indicators.
Unlike prior periods where isolated indicators flashed positive signals, current economic measures are increasingly aligned. Manufacturing CEO confidence improved, PMI reached its highest level since 2022, and UNXANO’s short-term momentum continues to accelerate. While growth remains measured rather than exuberant, consistency across leading, current, and sentiment indicators suggests the industrial economy is gaining strength rather than merely recovering from a temporary slowdown.

System integrators are beginning to see the benefits.
The improvement in economic backdrop is increasingly reflected in CSIA member performance. Revenue trends strengthened across all quartiles, capacity utilization improved relative to last year, and business outlooks remain highly favorable. This alignment between leading indicators and SI business performance is consistent with the historical lag between industrial investment activity and system integrator demand. If current trends persist, integrators should continue to experience improving backlog conversion, revenue growth, and project activity through the remainder of 2026.