U.S. Economy: January 2026 Economic Report Shows Manufacturing Rebound

U.S. Economic Health Report — January 2026

Executive Summary

January 2026 economic data show an economy that is still growing but evolving as the business cycle matures. The Bureau of Labor Statistics (BLS) reported that non-farm payrolls increased by roughly 130,000 positions and the national unemployment rate held steady near 4.3 percent. Job gains remained concentrated in health‑care, social assistance, and construction, while sectors such as federal government and financial activities shed workers. In the private sector, the ADP National Employment Report estimated that employers added about 22,000 jobs in January, with hiring skewed toward smaller and mid‑sized companies. Manufacturing conditions improved markedly: the Institute for Supply Management (ISM) Manufacturing PMI jumped to 52.6 percent, its first expansionary reading in a year and a signal that new orders and production have turned up. Meanwhile the Treasury yield curve steepened modestly, with the average difference between 10‑year and 2‑year Treasury yields widening to about 0.67 percentage points. Taken together, these indicators point to an economy that continues to grow at a moderate pace, supported by services‑sector hiring and a nascent manufacturing rebound, while the yield curve suggests investors expect growth to persist but remain cautious.

Labor Market: BLS vs ADP

BLS Employment Situation. The January Employment Situation showed total nonfarm payroll employment rising by about 130,000 jobs, a modest increase that follows upward revisions to the preceding months. The unemployment rate was little changed at 4.3 percent, equivalent to roughly 7.4 million people unemployed. Among major worker groups, unemployment rates were fairly stable: adult men, 3.8 percent; adult women, 4.0 percent; Whites, 3.7 percent; Blacks, 7.2 percent; Asians, 4.1 percent; and Hispanics, 4.7 percent. The number of long‑term unemployed (those jobless 27 weeks or more) held near 1.8 million and represented about one‑quarter of all unemployed people. The labor‑force participation rate edged up to around 62.5 percent, and the employment–population ratio moved to 59.8 percent, both essentially unchanged over the past year. Part‑time employment for economic reasons declined to roughly 4.9 million, suggesting fewer people had their hours cut or were unable to find full‑time work. The number of people not in the labor force who wanted a job but were not actively seeking one fell slightly to about 5.9 million.

Employment gains were uneven across industries. Health care once again led the way, adding about 82,000 positions, with strong hiring in ambulatory health‑care services (+50,000), hospitals (+18,000) and nursing and residential care facilities (+13,000). Social assistance employment grew by roughly 42,000, largely due to a 38,000 increase in individual and family services. Construction employment expanded by about 33,000 jobs, largely in nonresidential specialty trade contractors (+25,000). In contrast, federal government payrolls fell by roughly 34,000 due to the end of temporary positions associated with the decennial census, and financial activities employment declined by approximately 22,000, with notable cuts among insurance carriers. Employment was little changed in manufacturing, retail trade, professional and business services, transportation and warehousing, and information. Average hourly earnings for all employees increased by about 0.4 percent to $37.17, while earnings for production and nonsupervisory workers rose to $31.95. The average workweek lengthened slightly to 34.3 hours, and manufacturing workers clocked 40.1 hours on average with 3 hours of overtime.

ADP National Employment Report. ADP’s private‑sector survey painted a somewhat softer picture. It estimated that private employers added roughly 22,000 jobs in January, signalling a slowdown after December’s modest rebound. Hiring was concentrated in education and health services (+74,000), as hospitals, nursing homes and social assistance organizations continued to staff up. The trade, transportation and utilities sector added about 4,000 jobs, while leisure and hospitality employment rose by roughly 4,000. Manufacturing shed around 8,000 jobs, and professional and business services lost about 57,000 positions, reflecting continued retrenchment among white‑collar employers. Construction employment increased by about 9,000, offsetting small declines in natural resources. Financial activities saw a gain of approximately 14,000 jobs, while the information sector eliminated about 5,000 positions. By region, the Northeast gained about 17,000 jobs and the Midwest added 25,000, whereas the South and West lost 10,000 and 11,000 jobs, respectively.

Hiring patterns differed by company size. Very small businesses (1–19 employees) added about 30,000 jobs, but those with 20–49 workers cut roughly 30,000 positions. Medium‑sized companies (50–249 employees) were the strongest contributors, adding around 37,000 jobs, and firms with 250–499 employees added about 4,000. Large companies (500+ employees) reduced payrolls by approximately 18,000, highlighting cautious staffing plans among major employers. Pay growth for job‑stayers increased 4.5 percent compared with a year earlier, a slight uptick from December, while job‑changers saw pay increases of 6.4 percent year over year. ADP also noted that small and mid‑sized firms account for an increasing share of job creation, whereas large employers have pulled back. Overall, the divergence between BLS and ADP estimates suggests some uncertainty around the true pace of private‑sector hiring; however, both reports indicate that the labor market continues to add jobs at a slower pace than earlier in the cycle and that wage pressures are gradually easing.

Yield Curve Analysis

The interest‑rate environment in January reflected cautious optimism about the economic outlook. The average yield on the 10‑year U.S. Treasury note during the month was roughly 4.21 percent, while the 2‑year note averaged about 3.54 percent, resulting in a monthly average 10‑year minus 2‑year spread of approximately 0.67 percentage points. This positive spread marked a slight steepening from December’s 0.64‑percentage‑point gap and was the largest since mid‑2022. A normal (positive) yield curve typically indicates that investors expect future growth and inflation to be higher than short‑term rates, whereas an inverted curve, as experienced in 2023 and early 2024, often signals heightened recession risk. The persistent return to a positive spread since late August 2025 is therefore noteworthy. However, the curve remains relatively flat compared with past expansions; in healthier cycles the 10‑year rate often exceeds the 2‑year rate by one to two percentage points. The modest steepening implies that bond markets are slightly more confident about medium‑term prospects, perhaps reflecting hopes that the Federal Reserve may cut policy rates later in the year while economic activity remains resilient. Should the spread widen further, it could signal strengthening growth expectations; conversely, a re‑flattening or inversion would heighten concerns about a potential slowdown.

Manufacturing and Business Activity

January marked a turning point for U.S. manufacturing. The ISM Manufacturing PMI jumped to 52.6 percent from 47.9 percent in December, signalling expansion in factory activity for the first time in 12 months. Of the five components that directly feed into the PMI, three—new orders, production and supplier deliveries—moved into expansion territory, while employment and inventories continued to contract albeit at a slower pace. The new orders index surged 9.7 percentage points to 57.1 percent, its highest level since February 2022, suggesting a surge of fresh demand as businesses replenished depleted inventories and responded to stronger bookings. The production index increased to 55.9 percent, indicating that factories ramped up output at a faster rate. Supplier deliveries registered 54.4 percent, implying that vendors are taking longer to deliver materials, often a sign of rising demand and supply chain congestion. Inventories remained in contraction at 47.6 percent but improved slightly, while customers’ inventories were reported as too low, at 38.7 percent, suggesting that downstream buyers may need to reorder goods.

Employment in manufacturing improved but remained below the 50 threshold, rising to 48.1 percent from 44.8 in December, signalling that job cuts continue but at a slower pace. The prices index increased to 59.0 percent, indicating that input costs are rising and potentially hinting at renewed inflationary pressures. The backlog of orders jumped to 51.6 percent, moving from contraction to expansion, and the new export orders index rose to 50.2 percent, showing that overseas demand picked up. Imports also improved, with the index rising to 50.0 percent from 44.6. Nine of the 18 manufacturing industries surveyed reported growth in January, led by printing and related support activities; apparel, leather and allied products; fabricated metal products; primary metals; transportation equipment; machinery; chemical products; food, beverage and tobacco; and computer and electronic products. Respondents cited a post‑holiday replenishment cycle, easing supply constraints and favourable price conditions as drivers of the rebound. However, some commodity inputs—such as aluminium, brass, copper, steel and labour—were reported in short supply and rising in price, while gasoline, plastic resins and certain steel products declined in price. Although the January PMI signals renewed momentum in manufacturing, the improvement is nascent and could be vulnerable to shifts in consumer demand, inventory management, or global economic conditions.

Integrated Economic Outlook

Taken together, January’s data suggest that the U.S. economy continues to expand but has transitioned into a later stage of the business cycle with more tempered growth. The labour market remains fundamentally strong but is cooling: unemployment at 4.3 percent is historically low, yet job gains are moderate and concentrated in services; large employers are cautious; and wage growth is gradually decelerating. The ADP and BLS reports diverge somewhat but collectively point to a labour market that is balancing supply and demand more evenly. The manufacturing sector, which contracted for most of 2024 and 2025, returned to expansion thanks to an unexpected surge in new orders and production. This rebound, if sustained, could support broader growth by boosting goods output and easing concerns about an industrial recession. The yield curve’s modest steepening indicates that investors have become slightly more optimistic about medium‑term prospects, though the curve’s overall flatness reflects underlying caution. Services‑sector resilience, a nascent manufacturing recovery, and cooling inflationary pressures form a picture of an economy that is stabilising after a period of deceleration. Nonetheless, risks remain: consumer spending could soften as households exhaust savings and face higher borrowing costs; geopolitical uncertainties and supply‑chain disruptions may re‑emerge; and monetary policy settings could weigh on investment. Overall, January’s indicators paint a narrative of cautious expansion, with the potential for growth to persist at a moderate pace if current trends continue.

What to Watch Next Month

• Unemployment and payroll growth. February’s Employment Situation will reveal whether the unemployment rate holds near 4.3 percent and whether job creation remains steady or slows further. Pay close attention to revisions to January data and to hiring trends in sectors such as health care, leisure and manufacturing.

• ADP versus BLS consistency. Monitor the February ADP National Employment Report for confirmation that private‑sector hiring aligns more closely with the official BLS figures or continues to diverge. Look at which industries and firm sizes are driving gains or losses.

• Manufacturing PMI direction. Watch whether the February ISM Manufacturing PMI remains above 50, confirming that January’s rebound was not a one‑off. Focus on new orders and employment subindexes to gauge the durability of the improvement.

• Yield curve movements. Track changes in the 10‑year minus 2‑year Treasury yield spread. A continued steepening would suggest improving growth expectations, while renewed flattening or inversion would indicate rising concerns about economic momentum.

• Consumer spending and services strength. Pay attention to high‑frequency indicators such as retail sales, personal consumption expenditures and the ISM Services PMI to assess whether consumer demand remains robust. The services sector has been the economy’s stalwart and will be critical in sustaining expansion through early 2026.