It’s probably the biggest question at the start of any new year. What’s to come? Sources say you can expect good things on the manufacturing front. 

According to Taylor St. Germain, economist and senior consulting speaker at ITR Economics, the manufacturing outlook for 2026 is positive. His message: Be prepared for manufacturing growth. He expects growth to concentrate in the South and West. 

The South is an area of interest for many. A recent Oxford Economics report, “Made in America—Investments Favor Southern Metros” (September 2025), states that “Decision-makers tend to favor the South for new construction due to tax incentives and lower regulations.”

Quality spoke to Barbara Denham of Oxford Economics about the report. She noted that several industries were experiencing strong growth, particularly in batteries and electric vehicles. In terms of new construction, “Everybody wants to be the in the South,” Denham says. In the report, she writes, “Overall, we expect future manufacturing trends to resemble recent trends, with continued migration of new production moving southwards and relatively stronger growth in these higher-productivity, advanced manufacturing subsectors.”

St. Germain expects growth as well. He forecasts strong manufacturing and industrial demand through 2026. Growth is threatened by rising labor costs and tariff-driven inflation, he notes, but automation is one solution. 

“When we look at the data, we have GDP expanding for the next 12 quarters,” St. Germain says. “We have our weekly economic performance since the beginning of the year growing at a healthy 3%.

We’ve got financial conditions healthy. We’ve got banks lending. My message is the fundamentals of our economy are very strong today. Yes, we’re facing some challenges with uncertainty and inflation. But when we look at the underlying data, it’s very positive.”

Read on for the crystal ball predictions for the year. 

What’s the overall spending forecast?

“We look at two primary metrics, industrial production and manufacturing. Manufacturing is just a subset of it,” St. Germain says. “We have manufacturing and industrial demand accelerating through 2026. So my message to manufacturers this year has been, listen, I know the last 12 to 18 months were tough. But when we look at the data, our leading indicators suggest that industrial and manufacturing demand only accelerates through really the entirety of 2026.

We have just crossed into the positive territory for manufacturing after being negative for most all of ‘24 and even early ‘25. So even though manufacturers might not be feeling the optimism just yet, it’s coming. And that’s what our data tells us.

So, of course, there’s different industries that will outpace others. But our sentiment is we need to prepare for accelerating growth to characterize 2026 in manufacturing.

And that is the overall sentiment. Now, the challenge I put forward is I tell manufacturers your sales and revenue is expected to grow in 2026. It’s expected to be a year of more demand, but your costs are also going to grow along with it in that. That is the challenge for this cycle in 2026.”

If you’ve felt more uncertain than usual this year, you’re not alone. St. Germain notes the U.S. Policy Uncertainty Index hit a record high in March and April 2025—“It actually outpaced the pandemic in terms of uncertainty, which is shocking to consider”—but the good news is that it has continued to subside. While uncertainty is still elevated, it’s heading in the right direction. 

“Our expectation would be that uncertainty continues to subside as more of these trade agreements come to fruition. And that is going to increase business investment for ‘26, which is our forecast.”

How about tariffs?

Tariffs from previous administrations are still in place, St. Germain notes.

“First, tariffs aren’t ever all good or all bad. You really have to take an industry by industry approach to understanding the industries that are going to be more disrupted. Now, the primary concern we have with tariffs is, of course, inflation. That’s where everyone talks about tariffs. We have a higher inflation forecast for 2026, and that is due in part to tariffs.”

People thought the tariffs announced in April 2025 would immediately see the impacts, St. Germain notes. The reality is that it often takes nine to 18 months to see the full inflationary impact of tariffs, he says—which brings us to 2026. 

What challenges will manufacturers see in 2026?

“The biggest challenge I have for manufacturers is still labor,” St. Germain says. “So we talk about this idea of profitless prosperity, and it’s really what I was describing to you in the beginning, which is we could be moving into a period where there’s economic growth, there’s sales and revenue growth, but your margins actually decline, which is really odd.

“But it’s because of, again, we talked about the tariff impact, but it’s the labor cost impact. Our company is forecasting that manufacturers face a 28% increase in their cost of labor between now and the end of this decade.

“That is a massive number for these manufacturing companies. And it has to do with the fact that, first of all, we’re pretty strict on immigration. I’ll leave the politics and political opinions up to everyone else, but it’s just the reality. We’ve got the baby boomers exiting the workforce more and more each day, and we didn’t have enough kids to replace these baby boomers leaving the workforce.

“Even though we’re all excited about this economic growth that we have in our forecast, how are we going to take advantage of this growth if we’re struggling so much from a labor cost standpoint and just access to labor? And so I talk with manufacturers a lot about driving their productivity and efficiency, especially with ways to offset people.

“That’s automation, it’s robotics, it’s AI, it’s these technologies we need to adopt. But if you want to see your profits grow, and if you want to have the capacity to take on this work, we can’t just assume the people are going to be there because from our perspective, they won’t. And so we need to find a solution to that problem.” 

What’s the outlook by region?

“There’s a lot of growth in the southeast,” St. Germain says. “There’s a lot of growth in the south. And then anywhere out west, not named California, you see quite a bit of growth. Population growth weighs heavily on our mind. So I always encourage manufacturers, as you’re thinking of opening new plants, as you’re thinking about new regional markets to penetrate, understand where the demand is going to be coming from based on some of this growth.”