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More recent developments, including cease-fire agreement and a potential reopening of the Strait of Hormuz, have reintroduced optimism to financial markets, which have rebounded nicely from their March lows. While we’re encouraged by this progress, positive economic data throughout the past quarter could potentially setup the markets for further upside as the year progresses. However, we must also consider the secondary effects to recent energy shocks and ask whether inflation may inflect higher this year and how that could impact Fed policy and market expectations.
Manufacturing: A Genuine Comeback
One of the most underappreciated developments of early 2026 was a durable recovery in U.S. manufacturing activity. After spending most of 2024 and early 2025 in contraction, the ISM Manufacturing PMI climbed back above expansionary territory of 50 in January and continued rising through March, reaching 52.7% — the highest reading since August 2022 and the third consecutive month of expansion. New orders, production, and supplier deliveries all held in positive territory. Of the six largest manufacturing industries, four were expanding in March.
The shadow over that recovery, however, was the ISM Manufacturing Prices Paid Index, which surged to 78.3% in March — up nearly 20 percentage points in just two months and the highest reading since June 2022. Panelists were explicit: Iran war disruptions to energy and global shipping were feeding directly into input costs. Manufacturing employment also stayed in contraction at 48.7%, with companies reluctant to add headcount amid ongoing uncertainty over tariff policy and trade.
Services: The Steadier Engine
The services sector has been the more consistent driver of U.S. growth throughout this cycle, and Q1 2026 was no exception. The ISM Services PMI registered 54.0% in March — its 21st consecutive month in expansion territory and among the strongest readings since late 2024. New orders hit 60.6%, the highest since February 2023, and backlogs expanded for the second straight month. The 12-month moving average for the Services PMI has been rising for three consecutive months, reinforcing the durability of services-sector demand.
As with manufacturing, the price story complicated the otherwise solid picture. The Services Prices Paid Index surged to 70.7% in March — the largest single-month jump in nearly 14 years. Every one of the 17 reporting industries noted higher prices. No commodity was reported lower in price. Rising fuel, shipping, and energy costs were the primary cited factors — a direct transmission of the oil shock into the broad economy.
The Leading vs. Coincident Divide
While still working through delays related to the government shutdown, The Conference Board’s index suite captures the tension well. The Coincident Economic Index — which measures the economy as it is right now — rose for the fourth straight month in January, with all four components improving. The economy, in real time, was still expanding. The Leading Economic Index, by contrast, fell for the fifth consecutive month in January, declining to 97.5. The six-month rate of decline has moderated compared to 2025, and 7 of 10 components were positive on a six-month basis, suggesting the deceleration is losing momentum. But the direction remains negative, and that data predates the Iran conflict entirely.
Consumer confidence tells a similar story of a present holding up even as the future looks uncertain. The Conference Board’s Present Situation Index rose a healthy 4.6 points in March to 123.3. The Expectations Index, however, fell to 70.9 — readings below 80 have historically been a reliable early warning of recession. Consumers are spending for today but growing more anxious about tomorrow.
The Labor Market: Resilient and Recalibrating
March’s jobs report was the quarter’s most upside surprise: 178,000 nonfarm payrolls added against a consensus of roughly 60,000, reversing February’s weather- and strike-distorted loss of 133,000. Healthcare, construction, and transportation led the gains. Manufacturing added 15,000 against an expected loss of 5,000. The unemployment rate edged down to 4.3%.
Wage growth moderated to 3.5% year-over-year — helpful for inflation but a sign of cooling labor demand. More structurally, the Dallas and San Francisco Feds have both highlighted that sharply reduced net immigration has pushed the labor market’s ‘break-even’ pace — the monthly job creation needed to hold unemployment steady — close to zero. The economy no longer needs 150,000 or 200,000 new jobs per month to maintain labor market stability. That recalibration matters: it gives the Fed more patience before interpreting soft payroll months as distress signals.