If January’s data had a personality, it would be cautiously optimistic…with a raised eyebrow. Beneath weather noise, policy uncertainty and AI angst, the U.S. economy continues to grow at a pace that is neither overheating nor rolling over. Call it Goldilocks for now.

Executive Summary

• • Manufacturing surprised to the upside, with ISM jumping into expansion for the first time in nearly a year although hiring remains cautious.

• • Services remain the economy’s backbone, supported by affluent consumers, AI-driven investment and easing financial conditions.

• • The labor market is cooling, not cracking as hiring is subdued, layoffs remain low and unemployment dynamics reflect supply constraints more than demand destruction.

• • Credit conditions and sentiment highlight a widening bifurcation, favoring large firms and higher-income households.

• • The Federal Reserve remains on hold, for now, with inflation risks lingering just enough to likely delay cuts until midyear.

Manufacturing: From False Dawn to Firmer Footing?

January’s ISM manufacturing report delivered a genuine upside surprise. The headline index jumped 4.7 points to 52.6,¹ marking the fastest pace of expansion since August 2022 and the first reading above 50 since February 2025. Strength was broad-based, with notable gains in new orders (57.1), production (55.9) and order backlogs (51.6),² the latter returning to expansion territory for the first time since 2022.

Low customer inventories, a classic leading indicator, suggest production momentum may persist into the spring. That said, survey anecdotes remain downbeat. Firms continue to cite tariff volatility, compressed margins and policy uncertainty, particularly around trade, as reasons to delay hiring and capex.

We have “been here before.” A post-election bounce in early 2025 quickly fizzled once tariffs and uncertainty reasserted themselves. The difference this time is the macro backdrop: fiscal stimulus from the One Big Beautiful Bill Act (OBBBA), easing financial conditions, rising defense spending and sustained AI investment could provide more durable tailwinds into 2026.

• Key takeaway: Manufacturing demand is improving, but employment will likely lag. So far this has been a productivity-led recovery, not a hiring boom.

Services: Still Doing the Heavy Lifting

While manufacturing grabbed headlines, services continue to quietly carry the economy. The ISM nonmanufacturing index held at 53.8³ in January, consistent with strong expansion. Business activity accelerated, and despite a modest pullback in new orders, the pipeline remains healthy.

Several structural supports remain firmly in place:

• • High-income consumer spending continues to drive discretionary demand.

• • Lower interest rates and fiscal support are easing financial conditions.

• • AI-related construction and IT investment, from data centers to cloud infrastructure, remains a powerful growth engine.

Inflation bears watching. The prices paid index ticked up to 66.6,⁴ reminding us that while disinflation is the trend, it may not be a straight line, especially early in the year when contracts reset and tariff effects linger.

• Key takeaway: Services growth appears to remain strong enough to keep GDP humming and the Fed patient.

Labor Market: No Hire, No Fire, No Panic

If there is a single phrase that best captures today’s labor market, it is “no hire, no fire.”

• • Job openings fell to 6.5 million in December,⁵ the lowest since 2020, pushing the openings-to-unemployed ratio down to 0.87, ⁶ its lowest since March 2021.

• • Yet layoff rates remain remarkably stable at roughly 1.1%,⁷ and initial jobless claims, while noisy due to winter storms, are rising from historically low levels.

• • ADP private payrolls rose just 22,000 in January,⁸ but revisions show hiring strengthened meaningfully in the back half of 2025.

The apparent contradiction, slower hiring alongside steady employment, reflects slower labor force growth, restrictive immigration policy and strong productivity gains. Oxford Economics estimates the breakeven pace of job growth is now about 20,000 jobs per month⁹ to keep unemployment stable.

AI fears continue to dominate headlines, but evidence of an imminent “jobpocalypse” remains thin. To date, layoff announcements have proven to be a poor predictor of actual layoffs, and much of the hiring slowdown in white-collar sectors predates ChatGPT entirely.

• Key takeaway: The labor market looks more like it is cooling by design than collapsing by accident.

Credit, Consumers and the Growing Divide

Beneath aggregate stability, the economy is becoming increasingly bifurcated.

Credit

The Senior Loan Officer Opinion Survey shows banks continuing to tighten lending standards for small firms, while easing conditions and reporting stronger demand among large firms—particularly those investing in AI. This divergence is likely to persist through 2026.

On the consumer side, credit growth improved by $24bn in December,¹⁰ split evenly between revolving and nonrevolving credit. Revolving credit growth reflects a solid holiday season, while auto lending should benefit later this year from lower rates and a new tax deduction of up to $10,000¹¹ in auto loan interest.

Consumers

Consumer sentiment ticked up in February, with one-year inflation expectations falling to 3.5%,¹² the lowest since early 2025. But sentiment gains were concentrated among middle- and high-income households, while lower-income consumers reported declines, another signal of widening economic divergence.

Importantly, sentiment remains a poor predictor of spending. Despite dour surveys, real consumption growth continues to run above trend, driven largely by wealth effects from strong equity markets.

• Key takeaway: Credit and confidence seem to be flowing to those who already have them, bifurcation is a feature, not a bug.

Conclusion: The Economy That Would Not Cooperate

Every cycle needs a villain. This one has tried tariffs, weather, AI anxiety, and sentiment collapse and yet growth persists. The US economy is not booming, but it is also not breaking. Instead, it is evolving: more productive, more unequal, and more dependent on capital and technology than labor. Or, put differently: the recession narrative keeps getting delayed… much like the January jobs report.

What We Are Watching This Week

• • January Employment Report (BLS): With the report delayed by the government shutdown and distorted by severe winter weather, headline payrolls may generate more noise than signal. We will focus less on the top-line job number and more on wage growth, revisions and labor force participation to gauge underlying labor-market momentum.

• • January CPI Inflation: Early-year price resets, residual tariff pass-through and seasonal quirks raise the risk of an upside surprise. A firm print would reinforce the Fed’s patience narrative; a softer reading would reopen the door to midyear rate cuts.

• • Retail Sales: Solid holiday momentum likely carried into January, particularly among higher-income consumers. We will be watching the control group closely as a proxy for real consumption growth in Q1.

• • Small Business Sentiment (NFIB): A useful check on whether improving manufacturing demand is translating into confidence and hiring intentions among smaller firms or whether credit constraints continue to bite.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2602-3

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