U.S. Economy Begins 2026 with Modest Growth Amid Policy and Technology Challenges

This analysis is based on the MarketWatch report [1] published on February 4, 2026, which examined the U.S. economic outlook at the start of the new year. The report indicated that the services sector—the largest component of the economy—expanded for the 15th consecutive month, while manufacturing returned to expansion territory for the first time in twelve months with the ISM Manufacturing PMI reaching 52.6% [2]. Despite these positive indicators, businesses face significant challenges from elevated tariff rates and the complexities of artificial intelligence adoption. Market performance on February 4, 2026, reflected this mixed sentiment, with the S&P 500 declining 0.50% and the NASDAQ falling 1.15%, while sector rotation toward cyclical industries suggested investor uncertainty about sustained economic momentum [0].

The January 2026 ISM Manufacturing PMI data represents a significant inflection point for the U.S. industrial base. The reading of 52.6% marked a 4.7-percentage point improvement from December’s 47.9% contraction reading, signaling the first month of expansion since January 2025 [2][3]. This development is particularly notable given that manufacturing had experienced 26 consecutive months of contraction prior to a brief two-month expansion in late 2024, making the current recovery a potentially more durable turning point.

The New Orders Index at 57.1%—up 9.7 percentage points—demonstrates robust demand fundamentals, though the Employment Index remaining at 48.1% indicates that job creation has not yet followed production gains [2]. This employment-production divergence suggests businesses are maintaining cautious hiring practices despite improved order volumes, likely reflecting ongoing uncertainty about policy environments and cost structures.

The services sector’s continued expansion confirms the two-speed character of the U.S. economy, where consumer-facing and business services have demonstrated greater resilience than goods-producing industries. The 15-month consecutive expansion streak represents the longest period of services sector growth since before the pandemic-era disruptions, indicating underlying structural demand strength in healthcare, financial services, professional consulting, and hospitality industries.

Stanford SIEPR research highlights that effective tariff rates have surged from 2.1% to approximately 11.7% as of January 2026, with consumer price pass-through exceeding 50% of the tariff burden [5]. This policy environment has created a significant cost structure challenge for businesses, with projections suggesting approximately 1% additional inflation pressure between late 2025 and early 2026. The manufacturing sector lost 68,000 jobs in 2025 despite production improvements, suggesting that tariff-related costs have pressured margins sufficiently to constrain hiring despite increased order activity [5][7].

Enterprise AI deployment has proceeded more slowly than the substantial investment figures would suggest. According to Stanford SIEPR analysis, only a small share of firms progressed to enterprise-level AI deployment during 2025, with the technology yet to demonstrate measurable aggregate labor market effects [5]. This creates a valuation dynamic where AI-exposed company valuations have risen sharply despite limited tangible productivity gains. Goldman Sachs estimates potential productivity gains of $8 trillion if AI capabilities are fully realized across the economy [5].

The confluence of manufacturing recovery and services sector strength positions the U.S. economy for continued expansion above historical trend rates. Stanford SIEPR projects GDP growth of 2.9% for 2026, with unemployment expected to remain around 4.5% [5]. The Federal Reserve is anticipated to implement two 25-basis-point rate cuts during 2026, which could provide additional support to interest-sensitive sectors if realized.

The February 4 market performance revealed a notable sector rotation pattern. Basic Materials advanced 1.54% as the best-performing sector, while Technology declined 1.61% and Utilities fell 3.86% [0]. This divergence suggests investors are repositioning toward cyclical sectors perceived as beneficiaries of improved manufacturing activity while reducing exposure to growth-oriented sectors that may face valuation pressure amid elevated interest rate expectations. The Russell 2000’s 1.34% decline indicates particular pressure on small-cap domestically-focused companies that may be more sensitive to domestic policy uncertainty.

The IMF projects global GDP growth of 3.3% for 2026, with global AI investment expected to increase from $1.76 trillion in 2025 to $3.34 trillion in 2026 [6]. These figures position the U.S. economy within a broader context of synchronized global expansion, though tariff-related trade tensions create potential headwinds for international commerce.

: Despite the PMI expansion, the continued contraction in manufacturing employment (Employment Index at 48.1%) raises questions about the breadth and sustainability of the recovery. The 68,000 manufacturing jobs lost in 2025 occurred despite improved production metrics, suggesting structural labor market challenges that may persist regardless of output trends.

: The Prices Index at 59.0% indicates continued upward pressure on input costs, which may compress profit margins for manufacturers unable to pass through price increases to end customers.

: The 1.61% decline in Technology sector performance on February 4, combined with the 1.15% NASDAQ decline, may signal investor concern about AI investment sustainability and valuation support for growth-oriented technology companies.

: Elevated housing, healthcare, and utility costs—combined with tariff-related price increases—could constrain consumer spending capacity, potentially dampening services sector momentum over the medium term.

: The strongest PMI reading since August 2022, combined with New Orders Index expansion, suggests opportunity for sustained manufacturing recovery if demand fundamentals hold [4].

: The gap between AI investment ($3.34 trillion projected) and realized productivity gains creates substantial opportunity for enterprises that successfully deploy artificial intelligence capabilities effectively.

: Anticipated rate cuts could provide financing conditions favorable for capital investment and expansion, particularly in interest-sensitive sectors including real estate and consumer durables.

The January 2026 economic data presents evidence of a U.S. economy maintaining expansion momentum despite significant crosscurrents. The manufacturing sector’s return to growth after twelve months of contraction, combined with continued services sector strength, supports the characterization of a “decent start” to the new year as described in the MarketWatch analysis [1]. However, the “hope things get even better” qualifier from business leaders reflects awareness that sustaining this momentum requires navigation of elevated tariff costs, uncertain AI adoption outcomes, and evolving Federal Reserve policy. The market’s sector rotation on February 4—away from Technology and Utilities toward Basic Materials—suggests investor recognition of these challenges and a potential reassessment of growth sector valuations relative to economically-sensitive industries [0]. Monitoring should focus on the evolution of tariff policy developments, manufacturing employment trends, AI deployment progress, and Federal Reserve communications regarding the anticipated rate cut path.

---

[0] Ginlix Analytical Database – Market indices and sector performance data
[1] MarketWatch - The economy got off to a decent start in the new year. Businesses hope things get even better.
[2] Seeking Alpha - Manufacturing PMI at 52.6%; January 2026 ISM Manufacturing PMI Report
[3] Forex Factory - US ISM Manufacturing PMI
[4] Advisor Perspectives - ISM Manufacturing PMI: Strongest Expansion Since 2022
[5] Stanford SIEPR - The U.S. Economy in 2026: What to Watch For
[6] Business Insider - Global Economic Growth Is Being Powered by 4 Things
[7] New York Times - Trump’s Trade Policies Sort Manufacturers Into Winners and Losers