2026 Economic Outlook for Manufacturers and Distributors

The economic outlook for the manufacturing and distribution industries in 2026 is set against a backdrop of several intertwined trends including tariff volatility, legislative opportunities presented in the One Big Beautiful Bill Act, accelerated adoption of artificial intelligence (AI), the impact AI adoption will have on the labor landscape, continuing supply chain evolution, and a drive to bring manufacturing back to domestic shores.

Assessing how these forces interact yields a nuanced and dynamic landscape, demanding adaptability and strategic foresight from industry leaders.

Tariffs: Shaping Cost Structures and Impact on Product Sourcing Strategies

Tariffs remain a persistent strategic wildcard. While they are sometimes deployed to protect local industries or retaliate in trade disputes, the unpredictability of their implementation — exacerbated by shifting political dynamics — adds significant complexity to supply chain planning. For example, a major Supreme Court case in late 2025 is expected to clarify the president’s authority to impose tariffs without congressional approval, potentially upending established practices.

For manufacturers, tariff-induced uncertainty pushes firms toward more flexible sourcing models. Rather than making an “either-or” choice between offshore and domestic production, companies are increasingly adopting blended sourcing, optimizing both cost efficiency and supply chain resilience. Some firms hold higher inventories to buffer lead-time spikes, while others engage in rapid vendor requalification to hedge against shifting duties.

Tariff Impacts on Sourcing and Pricing

Tariffs fundamentally reshape sourcing and pricing decisions for manufacturing and distribution firms by increasing costs, introducing unpredictability, and compelling strategic realignments across supply chains. When tariffs are imposed on raw materials, components, or finished goods, their costs can rise dramatically — sometimes overnight. This creates immediate pressure on margins and forces firms to make rapid adjustments: either absorb the increased expense, pass it on to customers, or seek alternative sourcing options.

Sourcing Shifts and Supplier Diversification

Businesses often respond to tariffs by diversifying their supplier base and pursuing nearshoring or reshoring strategies to minimize exposure. These efforts involve shifting procurement to countries or regions not impacted by tariffs, though this can lead to higher overall procurement expenses and potential disruptions during the transition. Procurement teams must consistently monitor trade policy changes and maintain agile relationships with suppliers to ensure continuity and stability.

Increased Pricing Volatility

The volatility introduced by tariffs causes fluctuating import costs, leading to unstable pricing environments for manufacturers and distributors alike. Companies with strong pricing models and dynamic forecasting capabilities are best equipped to navigate turbulent periods. Tariffs can also prompt renegotiation of contracts, shifts to alternative suppliers, and even abandonment of certain product lines if profitability can no longer be guaranteed.

Complexity and Operational Delays

Beyond direct cost impacts, tariffs add logistical and regulatory complexity. Both sourcing and distribution must now account for country-of-origin documentation, new customs requirements, and potentially rerouted logistics networks. These new burdens often mean increased administrative workload, delayed decision-making, and longer lead times, disrupting the traditional efficiency of global supply chains.

The One Big Beautiful Bill Act: Opportunities

The One Big Beautiful Bill Act (OBBBA) has ushered in significant changes for the manufacturing and distribution industries, focusing on incentivizing domestic production and expanding tax relief for business investments.

In response to economic pressures, rising interest rates, and increased competition, the OBBBA reforms the business interest expense deduction, shifting the limitation from earnings before interest and taxes (EBIT) to earnings before interest, taxes, depreciation, and amortization (EBITDA). This adjustment is especially impactful for manufacturers and distributors, as it takes into account the substantial capital investments these sectors make in machinery, equipment, and infrastructure. By enabling a larger portion of interest expenses to be deducted, the Act reduces the tax burden for businesses financing expansion, innovation, or inventory growth, promoting industry growth and long-term competitiveness.

OBBBA restores and makes permanent 100% bonus depreciation for eligible purchases such as new equipment or production technology, ensuring that manufacturers and distributors can fully expense major investments up front rather than depreciating them over several years. This certainty in tax planning allows companies to confidently pursue modernization, automation, and capacity upgrades, accelerating the adoption of advanced technologies and supporting the continued resurgence of domestic manufacturing in the U.S. market.

New Incentives for Manufacturing Facilities or Plants

One of the largest investments a manufacturer can make is in their manufacturing facility, and the OBBBA is trying to make that easier. One major effect is the introduction of a new deduction for qualified production property, allowing manufacturers to immediately write off 100% of new facility costs devoted to production if construction begins between January 19, 2025, and January 1, 2029 — provided those facilities are in service by January 1, 2031. This incentive encourages businesses to launch or expand manufacturing operations domestically, making it more financially attractive to invest in plant modernization and reshoring projects, rather than relying on offshore production.

The building also needs to be owned by the taxpayer performing the production activity, so leased property doesn’t qualify. This could open an opportunity for joint ventures with real estate developers to leverage the significant benefits of accelerated depreciation on the manufacturing facilities, with the joint venture holding both the facilities and the production activity. This could result in substantial tax savings on a present value basis compared to deductions spread over 39 years.

The purchase of an existing building can also be treated as qualified production property in limited cases. For instance, a production facility used by one company can’t be sold to a new manufacturing company and qualify, although some conversions of a building not previously used as a production facility may qualify.

Given the drastic difference between depreciating a building over 39 years versus 1 year, manufacturers looking for new production space will be motivated to construct new space, rather than purchase existing space, because the ability to get the benefits of accelerated depreciation on purchases of existing space is restricted. It will be interesting to see what this does to the market for those looking to sell their production buildings.

Restoration of Immediate Deductibility for Research and Development Expenses

For manufacturers that have research activities, they are aware of the change in 2022 that required research costs to be capitalized and amortized over 5 years (15 years for international research). Prior to 2022, research activities helped to generate tax credits and the related expenses were deductible. Now with the OBBBA, research expenses are deductible again in the year incurred, starting in 2025.

Furthermore, for businesses with less than $31 million in gross receipts in 2025, they can look to deduct the amounts incurred between 2022 and 2024 for domestic research that haven’t already been deducted. The options available are to 1) amend prior year returns to fully deduct the expenses incurred in those years, or 2) at the election of the taxpayer, the amounts not already deducted can be deducted in full in 2025 or over 2025 and 2026 rather than continuing the 5 years spread.

Artificial Intelligence: The Next Productivity Revolution

AI’s transformative role is rapidly expanding in manufacturing and distribution, becoming a key competitive differentiator. In manufacturing, AI-powered process automation, predictive analytics for machinery maintenance, and smart robotics systems boost productivity, reduce downtime, and optimize resource utilization. Companies leveraging AI-driven agile manufacturing platforms and digital twin technologies report significantly improved operational efficiency.

Distribution firms use AI to refine demand forecasting, route optimization, and real-time inventory management. These technologies enable firms to better anticipate customer needs, maximize asset utilization, and reduce costs. IoT-based sensors and machine learning help streamline warehouse operations, from picking to replenishment.

AI initiatives are not limited to productivity improvements; they are also driving new revenue streams. Implementing AI-enhanced customization (e.g., personalized packaging, on-demand production) can help to contribute to higher margins and stronger customer loyalty.

While maturity levels differ, AI adoption is a clear priority in 2026 for manufacturers and distributors of all sizes. As noted in our 2025 Manufacturing and Distribution Pulse Survey Report mid-sized firms ($10M–$99.9M in revenue) currently lead in AI adoption with 43% using AI assistants like GitHub Copilot and ChatGPT for document creation, research, marketing, and client communication. Larger enterprises, particularly those with $250M–$499.9M in revenue, are increasingly adopting more structured AI tools such as Microsoft Copilot, with up to 52% exploring these technologies.

The most mature AI deployments are reported among companies exceeding $1 billion in revenue, where 50% have integrated AI comprehensively into their operations.

Leveraging AI tools remains an ongoing journey marked by experimentation, learning, and progressive integration as companies strive to unlock competitive advantages and operational efficiencies.

Cybersecurity and Compliance Considerations

Rising cyber threats and evolving regulatory demands have positioned cybersecurity as a critical factor for 2026. Security services — including continuous threat monitoring, endpoint protection, and compliance management — are rapidly expanding as manufacturing and distribution businesses face complex regulatory frameworks and increasingly sophisticated attacks with the rise of AI implementation.

Strong cybersecurity and compliance strategies are now essential to an organization’s success, helping mitigate risk, avoid costly breaches, and maintain stakeholder trust. As cybercrime evolves with AI-driven attacks targeting supply chains, manufacturing lines, and operational data, advanced security capabilities and governance expertise will be indispensable for companies aiming for resilience and regulatory compliance.

Supply Chain Evolution and Resilience

The past several years exposed the vulnerabilities of global supply chains — pandemic-driven shutdowns, raw material shortages, and logistics snarls led to a strategic rethink. In 2026, supply chain design is increasingly predicated on resilience, agility, and geographic diversification.

Successful manufacturing and distribution companies pursue blended sourcing, decentralized production hubs, and multi-modal transportation options. Inventory strategies now feature more just-in-case buffers, as opposed to just-in-time lean models, mitigating the impact of sudden disruptions. Suppliers are requalified at a faster clip, and smarter contracts are engineered with greater flexibility to absorb external shocks.

Distribution companies are similarly doubling down on risk management, leveraging trade credit insurance, monitoring for counterparty risk, and actively managing physical and fiscal flows through advanced analytics.

Reshoring and the Return of Manufacturing

The movement to reshore manufacturing — bringing production back to domestic or regional locations — will continue to accelerate as companies face unprecedented disruptions in global supply chains. The COVID-19 pandemic exposed the risks of overreliance on distant suppliers and highlighted the importance of supply chain resilience, prompting manufacturers to reassess where and how they produce critical goods. Reshoring allows organizations to gain tighter control over logistics, quality, and scheduling, reducing vulnerabilities and enabling faster response to market fluctuations and consumer demands.

In 2026, reshoring is also being driven by technological innovation and the rise of Industry 5.0. Advanced automation, IoT, and AI-powered analytics are making domestic production more competitive by lowering labor costs, streamlining operations, and supporting efficient small-batch and custom manufacturing. Regionalization and reshoring go hand-in-hand, as companies seek to locate production closer to end markets, leveraging local workforce, infrastructure, and incentives from government programs designed to support domestic manufacturing revival. Areas like Texas are becoming epicenters of “Made in America” manufacturing, attracting both traditional and high-tech producers.

Sustainability is another driving force behind the return of manufacturing to domestic shores. As regulatory and consumer pressures to adopt eco-friendly practices intensify, manufacturers are prioritizing operations that support renewable energy adoption, resource optimization, and circular economy principles. Domestic reshoring enables greater transparency and control over environmental performance, while proximity to innovation hubs helps accelerate the digital transformation of manufacturing processes.

Ultimately, the resurgence of U.S. manufacturing is not just about risk reduction or compliance; it’s a bold strategic repositioning for competitive advantage. Leaders recognize the “proximity premium” in shortening supply chains, making resiliency, automation, and talent development central to their investment decisions. For many, reshoring is the key to protecting margins and ensuring long-term growth, as companies invest in automation, rethink sourcing strategies, and prioritize technology to adapt to new cost structures and market realities.

Navigate 2026 with Citrin Cooperman

2026 could be a transformative year for manufacturing and distribution. Companies that successfully harness AI, adapt to regulatory flux, buffer against tariff risk, and optimize increasingly regionalized supply networks are best positioned for growth.

Critical success factors for industry leaders in this environment include:

• Proactive scenario planning for policy, tariff, and supply chain disruptions.
• Accelerated adoption and integration of digital technologies and workforce development to support AI-driven models.
• Strategic capital investment in automation, resilience, and domestic capacity.
• Developing new business models that blend physical and digital, recurring and custom, revenue streams.
• Active engagement with public policy agendas to shape and anticipate legislative impacts.

2026 will reward those who turn uncertainty into opportunity, leveraging innovation and flexibility as primary competitive levers for sustained growth. For more information, please contact Mark Henry or a member of our Manufacturing and Distribution Industry Practice.