An Economy Moving Forward, Unevenly

The U.S. economy is still pulling in two different directions. Manufacturing remains weak, with the ISM Manufacturing PMI around 48 in December, another month below the line that separates growth from contraction. PMI readings are straightforward: numbers above 50 mean activity is generally growing, while numbers below 50 mean it’s shrinking. Factory managers continue to report soft demand, fewer new orders, and ongoing efforts to burn off inventory rather than invest in new capacity. There’s little sign yet that manufacturing has turned the corner.

Services, however, are doing much better. The ISM Services PMI rose to 54.4, showing steady growth supported by consumer spending and business demand. Inflation is cooling, but unevenly—goods prices have eased, while services prices remain sticky. The labor market is slowing, but in an orderly way: hiring has cooled, job openings are down, and wage growth is easing, without a sharp rise in layoffs.

Technology investment stands out as one of the few areas where spending still has momentum, particularly around AI and the data infrastructure that supports it. Real investment in data centers and information-processing equipment is growing at roughly a 10–15% year-over-year pace, compared with low-single-digit growth for overall nonresidential capital spending.

Data-center construction is running at more than twice its pre-pandemic level, and information-processing equipment now makes up nearly half of all equipment investment, up from about one-third a decade ago. Large cloud and platform companies continue to guide toward double-digit annual capex growth, with most of that spending directed toward servers, networking gear, and storage tied to AI workloads. This investment is concentrated among large firms with strong balance sheets and long planning horizons. It’s less about quick productivity wins and more about building durable capacity—compute, storage, and data pipelines—that will be used over many years. That makes this cycle steadier than past tech booms, though for now it’s helping stabilize growth at the margin rather than push it materially higher.

For mid-market and lower-market private equity, this environment means fewer easy wins and more focus on fundamentals. Slower growth makes it harder to lean on volume growth or leverage to drive returns, especially in manufacturing-linked businesses where demand and margins remain under pressure. Service-oriented companies with recurring revenue, stable customers, and limited capital needs are holding up better and continue to attract most of the interest.

Deal activity is happening, but it’s slower and more selective, with fewer auction processes and more negotiated transactions. Value creation is coming more from operational work—pricing discipline, cost control, and working-capital management—than from financial engineering, and exit timelines are stretching as sponsors wait for clearer signals on rates and growth.

Monetary policy remains the main source of uncertainty. After December’s cut, the federal funds rate now sits at 3.50%–3.75%, and markets expect further easing later this year if inflation continues to cool and the labor market softens further. For now, the Fed appears content to pause, balancing still-elevated services inflation against ongoing weakness in manufacturing. Financial conditions are supportive enough to keep the economy moving, but uncertainty around the timing and pace of future cuts is keeping both markets and dealmakers cautious. Looking ahead to the next quarter, growth is likely to slow modestly rather than pick up, with services continuing to carry the economy and manufacturing remaining a drag.

Put simply, the economy is holding up better than feared. Services are doing most of the work, inflation is easing, and while manufacturing is still soft, the bigger picture looks steady rather than strained. The first quarter should tell us how long that balance can hold.