January PMI Data Signal Continued Expansion Across the U.S. Economy

U.S. economic activity entered 2026 on firmer footing, with new data pointing to a broadening expansion across both manufacturing and services after a prolonged period of uneven performance. January survey from purchasing managers show manufacturing output rebounding into growth territory for the first time in a year, while the much larger services sector continues to expand at a steady pace. Together, the readings suggest the economy is stabilizing after the tightening cycle, even as cost pressures and labor constraints remain key challenges. Manufacturing sector delivered most notable improvement. The Manufacturing Purchasing Managers’ Index rose to 52.6 in January, up sharply from 47.9 in December, marking its first expansionary reading in twelve months. The increase reflects a meaningful shift in demand and production conditions after more than two years of contraction. Historically, readings above 50 signal growth in manufacturing activity, while levels above 47.5 are consistent with overall economic expansion. A surge in new orders drove much of the improvement. The New Orders Index jumped to 57.1, up 9.7 points from December and its strongest reading since early 2022. This rise indicates that customer demand has begun to recover, providing manufacturers with greater visibility into future production. The Production Index also strengthened, increasing to 55.9 from 50.7, suggesting that factories are responding quickly to the improved order flow. Despite the rebound, the manufacturing recovery remains uneven. Employment conditions improved but stayed in contraction territory, with the Employment Index rising to 48.1 from 44.8. The reading points to slower job losses rather than outright hiring, reflecting ongoing caution among manufacturers amid elevated interest rates and lingering uncertainty about the durability of demand. Inventories also remained in contraction, with the Inventories Index at 47.6, signaling continued efforts to manage stock levels carefully after earlier periods of excess. Price pressures in manufacturing persisted but showed no signs of re-acceleration. The Prices Index edged up to 59.0 from 58.5, indicating that input costs continue to rise but at a controlled pace. Reports of higher prices for metals, electronic components, and labor highlight ongoing supply-side constraints, even as improved logistics and easing shortages in some materials have reduced volatility. While manufacturing showed signs of renewed life, the services sector continued to provide stability. The Services PMI held steady at 53.8 in January, matching its December reading and marking the 19th consecutive month of expansion. The index is now at its highest level since October 2024, underscoring the resilience of consumer- and business-facing industries that account for the bulk of U.S. economic output. Business activity in services strengthened further. The Business Activity Index rose to 57.4, up from 55.2, reflecting faster growth across sectors such as health care, construction, retail trade, and professional services. This acceleration suggests that demand for services remains solid despite higher borrowing costs and slowing employment growth. New orders in services remained in expansion but moderated. The New Orders Index slipped to 53.1 from 56.5, indicating that while demand continues to grow, the pace has slowed. This deceleration aligns with broader signs that consumers and businesses are becoming more selective in spending, particularly on discretionary services. Labor conditions in services softened slightly. The Employment Index declined to 50.3 from 51.7, signaling marginal growth in payrolls at a slower pace. The reading suggests that hiring has stabilized rather than reversed, consistent with a gradual cooling in labor markets rather than abrupt weakness. Wage pressures remain a concern, however, as firms continue to compete for skilled workers in areas such as health care, construction, and professional services. Cost pressures in services remain elevated. The Prices Index increased to 66.6, up from 65.1, and stands above its twelve-month average. Rising prices were reported across a wide range of industries, including wholesale trade, finance, accommodation and food services, and transportation. These increases point to persistent inflation pressures in labor-intensive service sectors, where wage costs are slower to adjust. Inventory conditions diverged across the economy. In services, the Inventories Index fell sharply to 45.1 from 54.2, moving into contraction. This drop suggests firms are drawing down inventories, possibly in response to slower new orders or efforts to improve cash flow amid higher financing costs. In manufacturing, customer inventories were reported as “too low, ” with the Customers’ Inventories Index at 38.7, reinforcing the case for continued production growth. Trade-related indicators painted a mixed picture. In manufacturing, New Export Orders rose to 50.2, returning to expansion after months of weakness, while imports held steady at 50.0. In services, export orders and imports both slipped into contraction, reflecting softer global demand and uneven. Taken together, the January data suggest that the U.S. economy is regaining balance rather than accelerating sharply. Manufacturing is emerging from a prolonged slump, supported by a rebound in orders and production, while services continue to expand at a moderate but reliable pace. The combination points to steady overall growth rather than overheating. For policymakers, the figures reinforce the view that restrictive monetary policy is working as intended. Demand is cooling in some areas but remains strong enough to sustain expansion. Price pressures have eased from earlier peaks but remain elevated, particularly in services, arguing against premature easing. At the same time, improving manufacturing conditions reduce the risk of a broader industrial downturn. For businesses and investors, the message is cautiously constructive. The return of manufacturing growth improves the outlook for capital spending and industrial earnings, while the resilience of services supports consumer-facing industries. Yet the persistence of cost pressures and uneven hiring underscores the need for careful planning in an environment where growth is steady but not robust. As 2026 unfolds, the key question will be whether the manufacturing rebound can be sustained and whether services inflation begins to cool more decisively. For now, the economy appears to be navigating the transition from tightening toward normalization with fewer disruptions than feared — an outcome that would mark a meaningful shift from the volatility of recent years.

Upcoming Week:

This week delivers a concentrated set of indicators focused on consumer activity, labor market conditions, housing, and inflation, all of which will be closely watched by investors assessing the strength of demand and the outlook for monetary policy. Together, these releases will help clarify whether economic momentum is stabilizing or continuing to cool. On Monday, week begins with 6-Month Bill Auction providing insight into short-term government borrowing conditions and investor demand for safe assets. Auction results often influence short term Treasury yields and can signal shifts in market expectations around interest rates and liquidity. On Tuesday, attention turns to consumer spending. Retail Sales for December are expected to rise by 0.4%, matching the trailing twelve-month pace of 0.4%, suggesting steady consumer demand despite tighter financial conditions. Core Retail Sales, which exclude autos and provide a clearer view of underlying consumption trends, are also expected to increase by 0.4%, again in line with their TTM level. If confirmed, these figures would indicate resilience in household spending, a key driver of overall economic growth. The same day, the EIA Short-Term Energy Outlook will be released, offering updated projections for oil and gas supply, demand, and prices. On Wednesday, the focus shifts to labor market. Average Hourly Earnings for January are expected to rise by 0.3% month over month, slower than the TTM of 0.5%, pointing to moderating wage pressures. Nonfarm Payrolls are projected to increase by 70,000, well below the TTM level of 143,000, signaling a cooling in overall job creation. Private Nonfarm Payrolls are also expected at 70,000 compared with a TTM pace of 111,000, reinforcing the picture of softer hiring. Manufacturing Payrolls are expected to decline by 5,000, versus a trailing twelve-month increase of 3,000, highlighting continued weakness in the industrial sector. The Unemployment Rate is expected to rise to 4.4% from a TTM level of 4.0%, suggesting gradual easing in labor market tightness. On Thursday, housing market data comes into focus with Existing Home Sales for January expected at 4.22 million units, above the trailing twelve-month level of 4.08 million. An increase in sales would suggest some stabilization in housing activity, potentially reflecting improved affordability or easing mortgage rate pressures. On Friday, the week concludes with inflation and balance sheet data. The Fed’s Balance Sheet update will provide insight into the overall liquidity conditions in the financial system. CPI for January is expected to rise by 0.3% month over month, down from a trailing twelve-month increase of 0.5%, while Core CPI is also expected to increase by 0.3%, compared with a TTM pace of 0.4%. These readings would point to a moderation in inflation pressures, a development that could support expectations for a less restrictive policy stance over time. Overall, this week’s data will be critical for shaping market sentiment. Softer labor market indicators combined with moderating inflation could reinforce expectations of policy easing later in the year, while resilient consumer spending and housing activity may temper concerns about a sharp economic slowdown. Financial markets are likely to respond to any surprises, particularly in employment and inflation data, as investors reassess the balance between growth and price stability. For the full list of indicators, please refer to the table on the right.