Optimism Meets Mandatory Modernization for SMMs
When people think of U.S. manufacturing, they often picture sprawling automotive plants or aerospace mega-factories. In reality, manufacturing is an industry comprised of small businesses. Over 98% of all manufacturing enterprises in the United States are small to mid-sized, and the vast majority of those actually employ fewer than 20 employees. Small to mid-sized manufacturers (SMMs) are typically defined as companies with fewer than 500 employees and are heavily relied on by the U.S. economy.
At Arrowhead, we partner with a broad range of SMMs and are privileged to serve outstanding companies that are the backbone of the American industrial sector. After an extended period of contraction and flat demand, it’s exciting to see that the sector is experiencing a cautious renewal. Data from a recent National Association of Manufacturers (NAM) survey (nam.org/2026) reveals that optimism has climbed back above historical averages, with 70% to 79% of companies reporting a positive outlook in 2026. Crucially, SMMs are currently forecasting stronger near-term growth in sales, production, and full-time hiring than their larger enterprise counterparts.
However, navigating this rebound requires managing severe operational friction. The economic conditions are impacting SMMs across four major areas:
1. The Cost Squeeze: Healthcare and Raw Materials
While mega-corporations can leverage massive purchasing power, smaller companies are bearing the brunt of localized inflation. A top concern is the rising costs of healthcare and insurance. In addition, SMMs expect raw material prices to increase by nearly 4% over the next year.
2. Trade Policy and Supply Chain Agility
Trade uncertainty and geopolitical disruptions (such as shipping delays in the Strait of Hormuz) have forced a shift away from "just-in-time" inventory models. SMMs are second-tier and third-tier suppliers to larger OEMs making them much more vulnerable to any upstream friction.
3. Capital Investments Spurred by Tax Incentives
A major driver of the current optimism among SMMs is legislative relief. Enhanced tax incentives, such as 100% first-year bonus depreciation and expanded write-offs for factory upgrades, have given smaller operations the financial runway to invest in themselves.
4. Forced Technology Adoption for Survival
Because SMMs continue to face persistent labor shortages, operational agility has shifted from a competitive advantage to a survival requirement. Smaller manufacturers are increasingly turning to targeted automation to scale production without exponentially growing headcount. SMMs are heavily adopting new automated technologies and predictive planning software to enhance and streamline production schedule.
It’s great to see the continued resiliency of small to mid-sized manufacturers in the first two quarters of this year. Our hope is that we’ll continue to see this trend through the remainder of 2026. The difference between successful and struggling SMMs this year won't be determined by size, but by data, strategy, and action. The manufacturers thriving right now are those treating their industrial data as an asset, using it to squeeze out every drop of efficiency, predict market shifts, and shield themselves from disruption.