The growth-producing sector of the economy is gaining momentum as the inventory glut recedes, uncertainty gradually dissipates, and a stable consumer base supports demand. Retail Sales, Wholesale Trade, and Industrial Production are all accelerating.
2026 will be a year of mild to moderate growth for these broad-based metrics of the economy; however, under the surface, there is significant deviation between individual markets. We are seeing evidence of a “K-shaped economy,” in which lower-income demographics are especially hard-hit while higher-net-worth consumers drive much of the growth.
Deviation is also present in the industrial and construction sectors. Relative winners include high-tech manufacturing, pharmaceuticals, and defense markets. Some markets that were hit harder in 2025 will see larger growth rates in 2026, in part due to a weak point of comparison, but they will likely remain below record highs due to sticky interest rates.
It is increasingly necessary to understand your downstream exposure across end markets, different consumer demographics, and regions. There was a lot of noise this last year from trade policy, but it is important to remember that consumers are the primary driver of the economy. They remain on relatively solid footing, with manageable debt service levels and rising real income. Additionally, the value of assets such as homes and the stock market are elevated, so we could see some positive wealth effects.
The cost of essentials and housing is weighing on consumer sentiment, particularly for younger or lower-income families. However, there is a weak correlation between consumer sentiment and economic activity. Consumers may be grumpy, but they are buying at an accelerating pace on both a dollar and volume basis.
Construction markets are going through a soft spot that will linger into 2026. Persistently low affordability and sticky interest rates are a drag on Single-Unit Housing Starts, and they will likely limit the next rising trend. Overall Nonresidential Construction faces downward pressure from interest rates, the soft economic conditions in recent years, and the gradual sunsetting of government spending.
We are anticipating some softness in the economy in 2027. Sticky interest rates and inflation over time will deteriorate the financial condition of some lower- and middle-income consumers. These cracks are not an immediate problem, but they will compound slightly further out. We expect that real income growth will be on the mild side, and savings are lackluster. Some of the consumption in 2026 will be debt-fueled, adding to consumers’ burden in 2027.
Weak residential construction trends, which typically lead the economy, foreshadow the next cyclical downturn. We are forecasting a plateau for the industrial sector in 2027, but results will vary by end market.
We anticipate a return to growth in 2028, fueled in part by the investments in onshoring over the past few years gradually coming online. The 2028 upturn will be a good time to cushion your balance sheet. Remain cautious of taking on debt, as we anticipate a large and protracted downturn occurring in the 2030s. Consider shifting your business toward the service sector and essentials such as food, medical care, or pets, as these are more recession-resistant later this decade.
Be measured in your plans. We expect labor costs will still rise roughly 20% between now and the end of 2029, so investments in efficiency and automation are advisable. Meanwhile, ensure you are on good terms with a banker. Most importantly, lead with confidence. A strong purpose and plan will go a long way to reassure your employees and your customers alike.
