We do not have a one-size-fits-all economy in 2026. Mild aggregate growth is masking uneven outcomes across consumer, industrial, and construction markets. These divergent outcomes are due in part to differing sensitivities to sticky long-term interest rates, inflationary pressures, and uncertainty.
The biggest winners are high tech and defense, with some positive spillover to supporting industries. Weak spots are discretionary big-ticket consumer items, legacy manufacturing, and industries tied to single-unit residential construction. If your business is trending differently from GDP, you are not alone; this cycle requires closer attention to end-market exposure and product mix to meet demand where it is.
Consumers are supporting mild macroeconomic growth. Employment is expanding at a slow pace, but inflation has stalled real wage growth. These factors will likely limit the pace of growth in the retail sector. Consumers still have room to take on more debt to finance spending, but sticky interest rates could deter borrowing for discretionary purchases. For those serving consumer markets, the demographic they serve will make a big difference.
Capex spending is accelerating due to both higher prices and increasing volumes. Tech investment and a drive for efficiency are common themes propelling capex higher. We are forecasting top-line rise ahead of the economy, but with heightened risk of stagnant or even declining volumes in 2027 and early 2028. Businesses should track unit activity closely instead of relying only on revenue trends. Avoid building inventories too aggressively late this year ahead of the softer demand environment in 2027.
Nonresidential construction activity is recovering overall. Lending conditions are becoming somewhat less restrictive, although there has not been much relief on interest rates. On the residential side, single-unit construction is soft due to affordability constraints, and sluggish conditions will persist into 2027. Multi-unit starts are presently stronger, but they are likely to weaken next year as softer rent growth and higher vacancies weigh on demand.
Input cost pressures are intense right now, creating margin pressure for businesses with price-sensitive customers. The war in Iran and disruption around the Strait of Hormuz add pressure to global energy markets and supply chains. While precedent suggests that oil prices will soften in the latter part of this year, there will be a lingering effect as those prices flow to downstream inputs such as plastics and fertilizers.
Metals prices are another pain point. The Iran supply shock is not the only factor. Higher inflation is also driven by a more positive demand environment and prior monetary policy decisions. While this bout of inflation is uncomfortable and may elicit memories of the early 2020s, our analysis indicates that inflation will be sticky but not as severe as that last cycle. Still, it is vital to have a strategy for managing your costs and improving efficiency to protect your bottom line.
Passive management of your business could put you at risk this cycle. Organic market growth is out there, but it is uneven, so it must be targeted. To future-proof your business, look for ways to tap into the higher-growth segments in the near term to bolster your balance sheet. In addition, strategize how to increase exposure to recession-resistant markets ahead of the prolonged downturn expected in the 2030s. Service-oriented and MRO offerings can be more resilient than producing goods and new construction. Companies should preserve flexibility as the K-shaped economy becomes more pronounced.
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