FLASH PMIs

USA: Flash PMI indicates slowest business growth for ten months inFebruary

At 52.3 in February, down from 53.0 in January, the headline S&P Global Flash US PMI Composite Output Index signaled ongoing, but moderating, growth of business activity midway through the first quarter of 2026. Output has now grown continually for 37 months, but February’s rise was the weakest recorded since last April.

Growth slowed to modest rates across both manufacturing and services, down to seven- and ten-month lows respectively.

New orders growth likewise cooled, with factories reporting a slight drop in orders for the second time in the past three months while service providers reported a weakened, but sustained, inflow of new work. Both sectors reported falling export orders, which collectively fell at one of the steepest rates seen over the past year.

Companies cited high prices, stretched affordability, tariffs, and subdued confidence among customers as key drags on sales, though adverse weather was often noted as an additional factor disrupting business across both manufacturing and services during the month.

Sluggish sales growth and concerns over rising costs led to a further month of very modest employment growth, albeit with some companies also reporting difficulties finding staff. Payrolls rose only marginally for a third successive month and at the weakest rate since last April. Hiring slowed to marginal rates in both manufacturing and services.

Capacity constraints, combined with weather disruptions meanwhile caused backlogs of work to accumulate in the service sector at a rate not seen since May 2022, but backlogs fell in manufacturing as production often exceeded inflows of new work.

Supplier lead times into factories lengthened in February to a degree not reported since October 2022, when the pandemic disrupted supply chains. February saw deliveries delayed due to bad weather, but companies also reported congestion in supply lines and delays from abroad, in part linked to tariff policy. Inventories of inputs consequently fell in February to the greatest extent since January 2025.

Average prices charged for goods and services increased in February at the steepest rate since last August, rising at an elevated rate well above the survey’s long-run average. Although selling price inflation moderated in the manufacturing sector to a 14-month low, attributed to increased discounting to stimulate sales, services inflation jumped to a seven-month high, registering one of the strongest rates of increase recorded over the past three-and-a-half years.

Higher prices were widely linked to the need to pass through increased supplier charges, in turn often associated with tariffs, as well as rising labor costs. Measured across goods and services, input cost inflation ticked higher and remained elevated above long-run levels in both sectors, albeit below some of the peaks seen last year.

Companies’ expectations for output in the year ahead improved markedly in February, rising to a 13-month high. Greater optimism was seen in both manufacturing and services. Companies were hoping that better weather will help drive better sales after February saw many businesses hampered by extreme cold. Survey respondents also cited expectations of improving economic conditions based on supportive financial conditions, including lower interest rates and government policies such as tax breaks, as well as more aggressive marketing and investment in business expansion.

Despite February’s improvement, future sentiment was fractionally below its long run average, reflecting concerns among many businesses regarding the adverse impact of policies such as tariffs and the broader uncertain political environment.

The PMI data so far this year are indicative of GDP rising at an annualized rate of just 1.5%, signaling a marked cooling of the economy in the first quarter compared to the robust growth rates seen in the second half of last year.

S&P Global’s 1.5% GDP growth rate for Q1 is below Goldman Sachs’ which sees +3.4% after incorporating a 1.3pp contribution from the end of the government shutdown in 2025Q4 (which S&P did not do). GS forecasts “2.5% GDP growth for 2026 Q4/Q4, a 0.3pp acceleration from 2025 Q4/Q4 that partly reflects the fading drag from tariffs giving way to a boost from tax cuts.”

KKR modestly upgraded their 2026e US GDP forecast to +2.5% from +2.3%, reflecting the ongoing strength we are seeing across techrelated capex and consumer services spending.

The more important signals we draw from this report are the fundamental momentum we are seeing in tech capex and consumer services spending.

Tech-related capex grew at a blistering 19% annualized rate in 4Q25, contributing 1.1 percentage points to growth in the quarter (i.e., fully 78% of 1.4% net growth). Growth was robust across major categories including tech equipment spending (+36% SAAR), data center construction (+18% SAAR), and software investment (+7% SAAR).

Software spending looks even stronger on a y/y basis at +14%, which is near the highest rate we have seen in the past 10+ years – an interesting counterpoint to consider amid the current market volatility for the sector.

Capex trends look increasingly ‘K-Shaped’ across tech vs. non-tech spending. As mentioned, techrelated capex grew near 20% y/y, while non-tech capex contracted by 4%. This dynamic contributes to the broader “K-shaped” patterns we are seeing including high vs. medium/low-income households and mega-cap vs. smaller companies.

In aggregate, consumer spending remains robust, particularly on the services side. Real personal consumption spending grew +2.4% annualized in 4Q25, which we consider particularly resilient for a quarter with essentially zero employment growth.

Services spending was particularly robust at +3.4%, while goods spending was stagnant at -0.1%. We expect the consumer backdrop to remain healthy in 1H26, amidst OBBA-related tax rebates.

Eurozone business activity rises at fastest pace in three months

(…) Faster increases in activity were recorded across both the manufacturing and services sectors in February. The more notable acceleration in growth was in the manufacturing sector. Here, the rise in production was the sharpest since August 2025, outpacing the expansion in services activity for the first time since that month. Highlighting the improvement in the manufacturing sector during February, the headline PMI rose to a 44-month high of 50.8, posting above the 50.0 no-change mark for the first time in six months.

Back at the composite level, Germany posted a solid increase in business activity that was the fastest in four months, while France registered broadly no change in output since January. The rest of the eurozone continued to see output increase, albeit at the slowest pace since June 2025.

While the expansion in euro area business activity picked up in February, the rate of new order growth was unchanged from the start of the year, remaining marginal. Manufacturing new orders increased for the first time in six months, and at the fastest pace in almost four years, but services new business growth slowed. New business from abroad (which includes intra-eurozone trade) fell again, with the pace of reduction broadly in line with that seen in January. (…)

Input costs increased sharply in February. The pace of inflation quickened again to reach the joint-fastest in 34 months, equal with that seen in February 2025. The acceleration in the overall rate of increase was driven by manufacturers, where input costs rose at the fastest pace since December 2022. Meanwhile, services input prices increased at a slightly slower pace than seen in January.

While the pace of input cost inflation quickened in February, firms raised their selling prices at a slightly softer pace. Nonetheless, the latest increase in charges was still solid and the second-fastest in the past year. In line with the picture for input costs, a faster rise in manufacturing selling prices contrasted with a slower pace of inflation in the services sector. Charges were up solidly in Germany, but French firms lowered their output prices for the first time in three months. The rest of the eurozone posted an accelerated rise in charges.

Japan: Private sector activity in Japan expands at steepest pace since May 2023

(…) A solid and accelerated rise in composite new business was also observed in February. In line with the trend for business activity, the rate of growth was the quickest since May 2023. While new orders expanded at the fastest rate in 22 months at service providers, manufacturers recorded the steepest increase in sales since the start of 2022, with businesses often noting firmer underlying demand conditions and the positive impact of new product releases.

Japanese companies also signalled stronger overseas demand, with composite new export orders expanding at the fastest rate in eight years, largely driven by a further rebound in demand for goods.

US GDP Grows 1.4%, Missing Forecasts on Shutdown, Trade

Inflation-adjusted gross domestic product increased an annualized 1.4% in the fourth quarter after rising 4.4% in the prior period, according to the government’s initial estimate out Friday. Overall, the economy expanded 2.2% last year, data from the Bureau of Economic Analysis showed.

The weak quarterly result — which was below all forecasts in a Bloomberg survey of economists — came as the US government was shut down for almost half of the three-month period. The BEA said the reduction in federal services during the shutdown subtracted about 1 percentage point from GDP, though the full impact couldn’t be estimated. (…)

“Strip out the shutdown drag and growth looks closer to 2.5%, with the US consumer still carrying the load and AI-linked investment doing real work,” Olu Sonola, head of US economics at Fitch Ratings, said in a note. (…)

Separate monthly BEA data out Friday showed the Fed’s preferred measure of underlying inflation — known as the core personal consumption expenditures price index — rose 0.4% in December, the most in nearly a year. On an annual basis, the core PCE, which excludes food and energy, climbed 3%, compared to 2.8% at the start of 2025. (…)

Consumer spending, which comprises the largest share of economic activity, decelerated to a 2.4% pace from 3.5% in the prior period. The slowdown was mostly due to less spending on durable goods like cars. Health care services spending rose to a record as a share of GDP.

Net exports also weighed on fourth-quarter growth, barely adding to GDP after boosting growth in the middle of the year. (…)

Business investment grew by 3.7%, powered by information processing equipment, reflecting the boom in AI spending. (…) Excluding computer equipment and software, business investment has declined in each of the last three quarters.

Because swings in trade and inventories distorted overall GDP last year, economists are paying closer attention to final sales to private domestic purchasers, a narrower metric of demand. This measure rose at a 2.4% pace in the fourth quarter, also a slowdown but still solid. (…)

Data: Commerce Department. Chart: Axios Visuals

Nominal expenditures on goods declined 0.1% MoM in December, confirming the previously released flat retail sales. Calendar quirks were mentioned to explain the soft December. November-December were up 2.5% YoY in nominal, +1.0% in real terms, markedly below the 3.1% growth rate for the whole year and +3.0% in Q3.

Spending on durable goods was –2.8% YoY in December after +2.7% and +1.6% on average in the previous 7 and 3 months. Full year 2025: zero growth! The splurge is officially over.

The Real Tariff Liberation Day Arrives at the Supreme Court

A 6-3 Supreme Court majority on Friday struck down President Trump’s sweeping emergency tariffs (Learning Resources v. Trump) in a monumental vindication of the Constitution’s separation of powers. You might call it the real tariff Liberation Day.

It’s hard to overstate the importance of the Court’s decision for the law and the economy. Had Mr. Trump prevailed, future Presidents could have used emergency powers to bypass Congress and impose border taxes with little constraint.

As Chief Justice John Roberts explains in the majority opinion, “Recognizing the taxing power’s unique importance, and having just fought a revolution motivated in large part by ‘taxation without representation,’ the Framers gave Congress ‘alone . . . access to the pockets of the people.’” (…)

Plan B: (WSJ)

(…) We have Section 301 tariffs of up to 25% on around half of all Chinese imports, due to alleged unfair trade practices by Beijing. We also have global Section 232 tariffs of up to 50% on imports of steel and aluminum, automotive goods, heavy-duty trucks, copper, and wood products—each imposed on grounds that these goods threaten U.S. national security.

The Trump administration has also created a process whereby “derivative” products made from goods subject to Section 232 tariffs will be covered by those same tariffs. This “inclusion” system is mind-bendingly complicated and has already doubled the coverage of Mr. Trump’s steel tariffs. Several other Section 232 investigations—on semiconductors, pharmaceuticals, critical minerals, commercial aircraft and more—were initiated in 2025, setting the stage for more tariffs in the weeks ahead.

(…) he announced a slate of new actions to replace his IEEPA tariffs. This includes the current 232 actions, initiating new investigations under Section 301, and imposing a global 15% tariff under Section 122 of the Trade Act of 1974, which empowers the president to address “large and serious” balance-of-payments deficits via global tariffs of up to 15% for no more than 150 days (after which Congress must act to continue the tariffs). The administration might later consider Section 338 of the Tariff Act of 1930—a short and ambiguous law that authorizes the president to impose tariffs of up to 50% on imports from countries that have “discriminated” against U.S. commerce—but this is legally riskier.

These measures will create global tariff regime similar to what Trump imposed under IEEPA. The main difference—and the main benefit for America’s economy and trading partners—would rest in how the president does so. IEEPA was essentially an Oval Office “tariff switch” that Mr. Trump could flip on and off at any time, for any reason and in any amount. This created massive uncertainty and crippling complexity for businesses, foreign governments and the U.S. economy.

The alternative authorities, by contrast, have substantive and procedural guardrails that limit their size and scope or, at the very least, give companies time to prepare for tariffs (or lobby against them).

To be sure, “guardrails” is a relative term for a president who has already stretched Section 232’s “national security” rationale to cover whipped-cream cans and bathroom vanities. And the courts have largely rubber-stamped the administration’s previous moves under Sections 232 and 301—a big reason why the tariff Plan B will feature them. Abuse is likely, as is more litigation. And unlike with IEEPA, we shouldn’t expect the courts to save us.

The justices’ ruling is an important victory for constitutional governance and will eliminate the most destabilizing element of Mr. Trump’s tariff regime. But until Congress reclaims some of its constitutional authority over U.S. trade policy and limits the president’s legal tariff powers, costly and erratic tariffs will remain the norm in the U.S., to our economy’s great detriment.

(Bloomberg)

• Mexico, Canada Get Exemption to 15% US Levy But USMCA Risk Looms

(…) The president said in the afternoon the US would impose a 15% levy on foreign goods under a different law. It took several hours before the White House clarified it’s leaving in place an exemption for many goods shipped under the US-Mexico-Canada Agreement.

That exemption means the effective tariff rate for Canada and Mexico will decline. Until the court decision, products that didn’t qualify for the USMCA exemption were taxed at 35% if from Canada and 25% if from Mexico.

For Mexico and Canada, the events provided more proof of the value of the tripartite trade deal, which was signed during Trump’s first term. But the president’s frustration over the court’s decision also raises the risk he may try to radically alter or even blow up USMCA altogether in pursuit of the tariff revenue he wants. (…)

“The president didn’t lose his leverage, he just lost a lever,” said Barry Appleton, a trade lawyer who has advised governments including the Canadian provinces of Ontario and British Columbia.

Now, he said, “we’re going to see weaponizations of a variety of different tools that were never, ever conceived of in that way, utilized in that fashion, because the president does not want to go to Congress.”

Before Friday’s development, the effective US tariff rate on Canadian goods stood at around 3.7%, according to estimates from Desjardins economist Royce Mendes. For Mexican products, the effective rate was about 4.4%, according to Grupo Financiero Base. It will be slightly lower for both. (…)

“The Trump administration could expand section 232, and in that case there’s going to be an increasing number of Mexican and Canadian exports subject to tariffs.” That’s the part of US trade law being used for the metals and automotive tariffs. (…)

Marroquin said it may become harder for the three countries to successfully extend the USMCA. The deal is up for review this year and the White House has made it clear it wants changes. Trump has privately asked aides why he needs to keep the pact going, Bloomberg has reported.

“It is basically putting more wood to the fire,” Marroquin said. “It is making it more painful for Mexico and for Canada to trade with the US even if they comply with the trade agreement.” (…)

Bloomberg:

The reality is that even before the court decision, Trump had started to quietly peel back some of the import taxes, in response to a public outcry over rising grocery bills and lobbying from chief executive officers. The administration is now revisiting how it applies steel and aluminum duties with an eye to reducing the impact on consumer goods, from canned drinks to underarm deodorant.

On New Year’s Eve, as Trump hosted a party at Mar-a-Lago, the administration said it was delaying new tariffs on kitchen cabinets and furniture. In November, import taxes on bananas, beef, coffee, chocolate and other imported foods were removed.

The White House has delayed the rollout of semiconductor and pharmaceutical tariffs that would raise the cost of imported consumer electronics and drugs. Trump has also pledged to send out $2,000 “tariff dividend” checks to all but the richest Americans and announced a $12 billion aid package to compensate farmers for lost exports.

• Corporate America demands refunds

The US Chamber of Commerce and the National Retail Federation were among the industry groups to immediately push for reimbursement for the billions of dollars in duties paid since Trump’s tariffs took effect last year. (…)

Neil Bradley, the group’s chief policy officer, said: “Swift refunds of the impermissible tariffs will be meaningful for the more than 200,000 small business importers in this country and will help support stronger economic growth this year.”

Dan Anthony, executive director of We Pay the Tariffs, a small business coalition opposing the levies, said it was “imperative that that money is then given back without some of these onerous processes”.

“Full, fast automatic refunds is really where our focus is going to be.”

FYI: These refunds could be remarkably easy: With almost all duty payments now made electronically, and with every IEEPA-related import assigned a specific tariff code, U.S. Customs and Border Protection could return most of the money owed to importers, with interest, at the push of a button. In several past cases, CBP has issued automatic blanket refunds covering many years and billions of dollars, and duty refunds in general are a daily occurrence. (WSJ)

Trump on Friday said it was “crazy” that the Supreme Court did not address whether the administration needed to issue refunds for tariff payments based on the ruling. “It’s not discussed. We’ll end up being in court for the next five years,” he told a press conference.

US Treasury secretary Scott Bessent echoed Trump’s remarks, indicating refunds were unlikely to be paid anytime soon. 

“My sense is that could be dragged out over weeks, months, years,” Bessent said at an event in Dallas, Texas. “I’ve got a feeling the American people won’t see it.”

When a deal is a deal:

The Treasury chief also called on US trading partners that have already reached agreements with the Trump administration based on the IEEPA tariffs to abide by them.

“I think that everyone is going to honor their deal,” he said on Fox News. He also said the Supreme Court had reaffirmed that the president has the right to “a complete embargo,” so that poses a “draconian alternative” for other nations. (BB)

Higher U.S. Tariffs Not to Blame for Jump in Chinese Exports to Europe, ECB Says The central bank’s economists say the increase in exports from China was due to developments under way before Trump hiked tariffs

Higher U.S. tariffs are not the main reason for a surge in Chinese exports to the eurozone, Africa and other parts of Asia, according to economists at the European Central Bank.

While President Trump last year hiked tariffs on imports from countries around the world, the duties faced by Chinese businesses are higher than most other countries. That has led to a sharp fall in Chinese exports to the world’s largest economy.

Policymakers around the world feared that Chinese businesses would look elsewhere for buyers of goods that they could no longer sell in the U.S., a process known as trade diversion that would lead to even fiercer competition for their local rivals.

However, by comparing the impact of the various tariff rates faced by Chinese goods in the U.S. with changes in imports of those goods elsewhere, the ECB’s economists concluded that there was little evidence of trade being diverted to the eurozone, although they did find some signs of diversion to Africa and countries in the Association of Southeast Asian Nations.

“Overall, trade diversion accounts for only a limited role in recent Chinese export dynamics, with other factors playing a more prominent role,” the economists wrote. (…)

“Unfair competition, especially from China, puts a lot of pressure on us,” French President Emmanuel Macron said Thursday ahead of a meeting of EU leaders to discuss the bloc’s response to its new economic challenges.

But the ECB’s economists concluded that the increase in imports was due to developments that were under way before Trump hiked tariffs, rather than diversion that might ease if the tariffs were to be reduced.

“Weak domestic demand has pushed Chinese firms to channel excess capacity abroad, supported by falling export prices, competitiveness gains reinforced by a weak currency, and state-led expansion of manufacturing capacity,” they wrote.

The sharp increase in Chinese imports might also be a problem for the ECB. The eurozone’s annual rate of inflation fell to 1.7% in January, and the ECB’s economists expect it to stay below the 2% target for this year and next.

Policymakers expect inflation to return to their target in 2028, and don’t see the miss as large enough to warrant a response in the form of further rate cuts. But should the inflow of cheaper Chinese goods continue, the risk of a deeper, sustained drop in inflation will increase.

Trump Will Travel to China in Late March for High-Stakes Xi Meet

US President Donald Trump plans to travel to China from March 31 to April 2 for a meeting with his counterpart Xi Jinping as the two leaders will look to navigate a trade relationship again plunged into uncertainty and navigate tensions around Taiwan. (…)

The US president said he expects a welcome that includes pomp and ceremony that surpasses his visit to Beijing in 2017 during his first term.

“President Xi, he treated me so well, he gave me a display, I never saw so many soldiers all the same height, exactly the same height,” Trump said. “But I said, ‘You’ve got to top it.’ He said, ‘I’ll top it. We’re going to top it.’” (…)

High expectations!

In Trump’s first visit to China since 2017, he will discover that China is far from being where the US “borrows money from Chinese peasants to buy the things those Chinese peasants manufacture” as Vance said last April.

BTW:

Brazil, India Seal Rare Earth Deal Amid Global Supply Strains

Brazil and India sealed a framework pact on critical minerals with the two countries agreeing to work closely on processing in a move aimed at securing rare earth supplies at a time of global disruption. (…)

Brazil, home to the world’s second-largest reserves of rare earths, offers India a potential alternative source of supply as it seeks to reduce reliance on China and secure inputs critical for electronics, clean energy and defense. The deal comes soon after India joined the US-led Pax Silica initiative to build resilient supply chains in semiconductors, artificial intelligence, and critical minerals. (…)

Brazil and India are strengthening cooperation, in part to emerge as leading voices for the developing world and seek greater influence over the technologies and supply chains reshaping the global order. (…)

New Delhi and Brasilia sought closer ties after US President Donald Trump slapped both countries with 50% tariffs. Indian tariffs were subsequently lowered to 18% after it signed a trade deal earlier this month. (…)

Trump Eases Mercury Rules for Power Plants in Bid to Boost Coal The Environmental Protection Agency rolled back limits on mercury and other toxic air pollutants for coal- and oil-fired plants.

The Environmental Protection Agency on Friday rolled back regulations limiting mercury and other toxic air pollution from power plants, the latest in a series of moves by President Donald Trump’s administration designed to boost the nation’s shrinking coal sector.

The 2012 Mercury and Air Toxics Standards for power plants rule — called MATS for short — requires the facilities to reduce emissions of mercury and other metal air pollutants, such as arsenic and lead, which have been linked to heart attacks, cancer and developmental delays in children. (…)

“The Trump EPA knows that we can grow the economy, enhance baseload power, and protect human health and the environment all at the same time.” (…)

The EPA says the new MATS rule could save $670 million starting in 2028 through 2037. In the final rule, the agency acknowledged that it did not quantify the human health effects resulting from changes in emissions of small particulate matter called PM2.5, nitrogen oxides, or NOx, and volatile organic compounds, or VOCs. The Biden EPA had estimated its strengthened rules would yield $300 million in health benefits and an additional $130 million in climate benefits.

The policy change comes days after the agency scrapped a scientific determination that climate change poses a threat to human health, and with it, greenhouse-gas standards for vehicles. (…)

• The FT:

Trump has made supporting the coal industry a significant objective of his second term, arguing that “beautiful, clean coal” is needed to meet booming electricity demand and shore up the grid in times of stress like extreme weather.

The administration has used emergency powers to keep open five coal plants that were scheduled for retirement, directed the defence department to buy coal-fired electricity and relaxed emissions and environmental standards which regulate coal ash disposal.

Just as leaded gas was a “cheap” fix for engine knock that cost trillions in lost human potential, easing mercury rules provides a “cheap” fix for power grid demands that may result in long-term health burdens for the next generation.

• Trump order to promote weedkiller sparks fury in MAHA movement Allies of Health Secretary Robert F. Kennedy Jr. are frustrated that the Trump administration has embraced chemicals that they say harm human health.

The Embarrassing Truth About Tariffs Why is Trump so upset about Federal Reserve economic research into his trade policies?

The White House this week opened a new front in its war on the Federal Reserve: a fight about Fed research on the consequences of President Trump’s tariffs. If the tariffs are such an unambiguous economic and political winner, why is the Administration so defensive about them?

The flap concerns the analysis we told you about last week by four economists at the Federal Reserve Bank of New York. They found that American households and businesses are bearing nearly 90% of the cost of the Trump tariffs, contrary to Mr. Trump’s claim that foreigners will pay.

Clearly the White House is worried that voters might conclude this research aligns with their own experience. Kevin Hassett, director of the National Economic Council, took to CNBC Wednesday to pan the New York Fed research as “the worst paper I’ve ever seen in the history of the Federal Reserve System” and suggested the people who wrote and published it should be “disciplined.” Disciplined how? Put in stocks? For a tariff paper?

The Fed analysis aligns with other research into the distribution of tariff costs from Harvard economists and Germany’s Kiel Institute—and with common sense. There isn’t widespread evidence that foreign producers are cutting their prices to offset the tariffs, the main mechanism by which foreigners would “pay” for the border taxes.

Nor is the dollar strengthening, which is the other possible mechanism for making foreigners pay (we’ll spare you the equations). Instead the tariffs are causing an increase in post-tariff prices of those goods that are still imported, alongside a modest decrease in the volume of imports. Americans pay higher prices, or “pay” in the form of less choice.

In his more honest moments, Mr. Trump admits this is the effect, if not the intention, of his tariffs. That’s what he meant when he said last year that Americans may have to buy fewer dolls for their children as a result of his trade policies. The handful of economists who support his tariffs believe the border taxes rebalance the global economy specifically by deterring American consumption.

The Fed research and similar papers try to put some numbers on these phenomena. The serious kernel of Mr. Hassett’s complaint, to the extent there is one, is that the New York Fed economists overlooked a wide range of other ways the tariffs could affect the U.S. economy, such as stimulating reshoring of production and an increase in domestic wages.

But such an analysis also probably wouldn’t flatter the Trump tariffs. So far the manufacturing boom Mr. Trump promised hasn’t appeared, as manufacturing jobs are down over the last year. The New York Fed and other research on cost distribution shows one reason why: To the extent American companies eat some of the costs of tariffs, that’s less cash available for investment and hiring.

The Trump economy has been as healthy as it is despite the tariffs, not because of them. The market response to his April 2025 “liberation” tariffs was so negative that the President quickly withdrew them and negotiated lower tariffs as part of “trade deals” that may turn out to be partly illusory. He has also laced the tariffs with multiple exemptions. A dollop of tax reform, a big dose of deregulation and an AI investment boom are allowing the economy to cope with the tariff distortions and uncertainty.

The attack on the Fed over this research is a symptom of the political problem the White House is encountering from tariffs. Thirteen months into Mr. Trump’s term and with elections looming, opinion polls show voters remain worried about the economy. This implies they don’t see a payoff from the tariffs (other than what they’re paying at the store).

Mr. Trump’s ire at current Fed Chairman Jerome Powell increased the more Mr. Powell warned that tariffs might raise prices. The Administration may be trying to warn Kevin Warsh, Mr. Trump’s nominee to replace Mr. Powell, away from a similar approach.

Here’s a better idea: If your tariff policy is so unpopular that you have to bully the central bank into not talking about it, maybe it’s time for a new policy.

WMT yesterday:

prices are rising on imported items and prices overall are still significantly elevated compared with the pandemic period, he said. In the U.S., Walmart prices for groceries grew less than 1% in the most recent quarter, while prices for general merchandise items rose 3.2%, a higher jump than the preceding quarter. Walmart expects similar price movements for the current quarter, in part due to the cost of higher tariffs, said Rainey.

Bank of America internal data:

Tariff payments per small business client were up 142% YoY in January on a 3-month moving average. And a recent analysis from the NY Fed found that US import prices for goods subject to the average tariff increased by 11% more than those for goods not subject to tariffs – underscoring that US firms and consumers continue to bear the economic impact of the high tariffs imposed in 2025.

• America Imported a Record Amount Last Year Despite Seismic Trade Policy Changes December trade deficit surged, capping turbulent year after tariffs

Imports to the U.S. grew to a record high in 2025, leaving the trade deficit little changed despite steep Trump administration tariffs aimed at closing trade gaps.

The nation’s trade deficit—the gap between imports and exports in both goods and services—was $901.5 billion last year, slightly smaller than the $903.5 billion deficit recorded in 2024, the Commerce Department said Thursday. The small change shows America’s role as a heavy net importer remains intact, at least thus far, despite seismic policy shifts during the year.

There were big swings in trade patterns along the way, however, including an early-year surge in imports as companies tried to get ahead of new tariffs. That surge rapidly reversed after some of the tariffs were rolled back and businesses adjusted to the new trade regime.

Overall, imports last year were $4.334 trillion, up about 5% from the prior record of $4.136 trillion in 2024. Exports were $3.432 trillion, up about 6% year over year.

Goods imports for 2025 totaled $3.44 trillion last year, about 4% greater than in 2024.

The trade deficit in goods last year rose to a record $1.241 trillion, up from $1.215 trillion in 2024.

(Bloomberg)

• On Thursday, Walmart also said consumers continue to spend cautiously, especially low-income shoppers. In the U.S., its largest business by revenue and profit, profit margins grew thanks to grocery sales, membership through its Walmart Plus program and advertising sales. But that growth was offset by slower sales growth in general merchandise, a dynamic that reflects shoppers giving priority to their spending needs. (BB)

Private-Credit Warning Signs Flash After Blue Owl Unloads $1.4 Billion in Assets The sale raises fears that the industry’s efforts to court individual investors will suffer

Wall Street has been eagerly selling private credit as a hot opportunity for individual investors. That sales pitch just got tougher.

Blue Owl Capital, a poster child for the industry, said it is liquidating $1.4 billion in assets to raise money to pay out individuals who bought into some of its funds in their heyday but now want to get out. The firm hoped the sale would shore up wobbling investor confidence.

Instead, the opposite happened. Stocks across the private-fund industry slid as the deal raised questions about how much fund managers can count on individuals to stay invested in hard-to-sell assets for the long term.

Blue Owl’s stock dropped 10% at one point Thursday and closing down nearly 6%. Shares of other private-credit titans also sank, with Apollo Global Management and Blackstone both falling about 5%.

“Right now it’s reducing confidence and reducing what anyone is willing to pay for these stocks or assets,” said Evercore Senior Research Analyst Glenn Schorr.

Private-credit funds use client money to make loans, largely to junk-rated companies, earning hefty interest payments that are handed out to investors through dividends. Stocks of these fund managers soared in recent years, in part on optimism that they could raise trillions of dollars from individual investors. That is already happening through funds targeting wealthy investors, like the Blue Owl one that is under pressure. And the industry is taking steps to make private fund investments available through 401(k) savings plans.

But the Blue Owl sale adds to a growing body of evidence of a disconnect between fund managers and individual investors. In private credit, firms buy harder-to-sell assets for longer periods of time, with the understanding their clients will be willing to stomach some turbulence in the middle. Retail investors, however, are accustomed to trading out of investments whenever they choose.

There are other signs that individuals are souring, including a jump in redemption requests at the end of 2025. More worrying to stock analysts: the flow of new investments that were expected to fuel future earnings growth is also slowing.

Inflows to “semiliquid” business development companies, or BDCs, that Blue Owl and others have sold aggressively to wealthy individuals dropped an average 15% over the last three months, according to research by Fitch Ratings. Monthly inflows to the largest such fund, which is managed by Blackstone, dropped to $600 million in January from $1.1 billion in November.

Fund managers say inflows still far outweigh redemption requests, reflecting pent-up demand from wealthy individuals, most of whom still don’t own much private-credit.

“If headlines stay bad and retail keeps reading them, we can expect more headwinds on flows into these funds,” said Ben Budish, a stock analyst at Barclays covering fund managers. (…)

More recently, Blue Owl sold loans held in three of its BDCs to large pension funds and insurance companies for 99.7 cents on the dollar. (…)

“They sold 30% of the portfolio at par and that’s great,” Evercore’s Schorr said. “But it also made people doubt and wonder what the rest of the portfolio in the fund is worth.”

This blog has been warning about private credit since last October.

• Give Them Credit! (October 3, 2025) highlighted the First Brands collapse could well be the first of many corporate accidents.

• Credit and Freedom (January 2, 2026) with Chris Whalen warning that Cracks Widen in US Credit, that the economy may not be as solid as many think:

The growing number of individual and corporate insolvencies are part of a rebound of a long-term trend of falling defaults. For more than a decade, total bankruptcy filings fell steadily, from a high of nearly 1.6 million in September 2010 to a low of 380,634 in June 2022. Total filings have increased each quarter since then, but like loan default rates, they remain far lower than historical highs.

Like credit metrics, the statistical measures of default reflect a growing tendency for negotiation rather than formal events of default.  Some estimates suggest that 1 out of three insolvencies are restructured out of court. (…)

One way to measure the stress building in private equity and credit is the poor performance of lenders to private businesses. Long-term equity returns for business development companies (BDCs) have been hammered since the middle of 2025 (…) “Short sellers are taking note of rising signs of stress within the private credit market, and using publicly traded BDCs to signal that outlook,” (…)

PIK or “Payment-in-Kind” refers to a mystical financial arrangement where interest or dividends are paid with additional securities, goods, or services instead of cash, allowing companies to conserve cash flow but increasing debt principal. PIK is commonly seen in high-risk sectors like leveraged buyouts and venture debt, with examples including PIK Notes and PIK Interest. But there are literally thousands of private equity financed companies now using PIK to avoid default.

Income from payment-in-kind debt, which allows borrowers to defer interest and can signal an inability to pay with cash, has been rising across BDCs, reaching 7.9% in the third quarter, according to data from Raymond James. In the third quarter, 3.6% of investments across BDCs were on non-accrual status, a designation that indicates a lender expects losses, Raymond James data show.

Like REITs, BDCs are pass through vehicles that must pay out most income. “BDCs still accrue the PIK loan coupons as non-cash income, but lack the corresponding cash to pay the required dividends, to maintain their favored IRS treatment,” NDP notes further. “If they lose that tax treatment, there is risk that such PIK loan coupons become taxable at the BDC level, rather than treated as simply passed through to BDC shareholders for taxation.  Then, the BDCs would lack the cash to pay the IRS, too.” (…)

We expect to see a growing number of BDCs, private equity sponsors and other parties forced to recognize asset impairments and related losses in the New Year. The backlog of private equity companies using PIK or other means to avoid bankruptcy is going to be cleared out substantially as it becomes clear that merely lowering short term interest rates will not make moribund PE companies attractive to investors. (…)

Lend More Upon Default (LMUD) has concealed the scope of the disaster and even pushed down reported loan default rates, but we suspect that 2026 earnings results will see the benign trend in bank credit defaults come to an end.

Classic! Too much money always, always results in speculative behavior, more so when people forget that economic cycles are actually not dead. Seeking higher returns, investors drift away from basic investment discipline and/or over-concentrate to one sector.

Greedy underwriters are quick to sniff it, leading to weak underwriting, limited transparency, limited due diligence, and loose covenants. Investors find comfort in “packages” forgetting, as Jim Chanos put it, that “We rarely get to see how the sausage is made.”

The mix and quality of risk now matter more than the quantity of risk one takes. In our view, 2026 should be a year to upgrade portfolios rather than stretch for yield, including moving up in quality where we can, locking in fixed-rate income where it is still adequately compensated, and leaning into collateral-backed structures that offer both contractual cash flows and protection in downside scenarios. (KKR)

Maybe you missed the last part of my February 18 post:

The share of private equity-backed companies that deferred cash interest payments ticked higher for a third consecutive quarter, pointing to growing signs of stress, Rene Ismail reports.

Data from valuation firm Lincoln International show that 11% of fourth-quarter borrowers paid interest in-kind, which is when creditors are given more debt in lieu of cash. More than 58% of those loans featured so-called “bad PIK,” meaning that borrowers opted to delay interest payments during the life of the loan versus when the debt was originated. Lincoln analyzed more than 7,000 companies during the fourth quarter.

“Companies we flagged as having bad PIK went from roughly 40/60 debt-to-equity, which is reasonable, to about 76% debt today — that’s a sign of stress,” said Ron Kahn, global co-head of valuations and opinions at Lincoln, which has data going back to the fourth quarter of 2021.

Bad PIK was in 6.4% of private loans last quarter, up from 6.1% in the three months prior and substantially higher than the 2.5% ratio recorded in the last three months of 2021.

And don’t presume this is limited to private credit.

The backlog of unsold companies in private equity is monumental. As the FT notes: “Private equity firms sell assets to themselves at record rate.” This will not end well. And the end may begin in 2026 as private equity companies fail in growing numbers.

The strong rally in silver and gold, and the weakness of crypto tokens, are leading the decline in US fortunes when it comes to the equity markets. Literally dozens of crypto ventures have failed in the past year, notes Comsure. Crypto exchange collapses have led to $30–50 billion in investor losses, the UK consultancy reports. But the greater concern is the mounting backlog of corporate insolvencies, a real and growing danger that could push the US into recession even as short-term interest rates fall.

As I wrote on January 2:

This right when the US government is taking several regulatory and executive actions to “democratize” access to private equity and private credit for retail and retirement investors.

Among many measures, the SEC is exploring changes to the “accredited investor” definition to focus more on investor sophistication rather than strictly wealth or income criteria.

How will the SEC objectively measure sophistication?

Sophistication is not intelligence, and certainly not judgement (remember LTCM).

Wealth and income are much better measures of one’s ability to weather investment losses than sophistication. This is what the “accredited investor” definition was for.

In today’s WSJ:

The Trouble With Public Access to Private Markets Small investors are unlikely to know what they’re doing—and the effect on public markets would be undesirable.

(…) In this challenging environment, “alternative” managers have begun looking at small investors as a potential solution. Their money is seen as fuel for growth and, perhaps more important, as exit money to satisfy the clamor of current investors who want out.

President Trump (in an August executive order) and the Securities and Exchange Commission have endorsed opening private markets to small investors. But there are pitfalls beyond the obvious problem that small investors may not know what they are doing. One is the effect on public markets.

The number of U.S. public companies exceeded 7,000 in 1997. Today’s total is less than half that and falling. Hamilton Lane reported in 2022 that only 13% of U.S. firms with more than $100 million in sales were public, leaving 18,000 companies out of reach to small investors. Letting small investors into private funds would address this situation, but it could turn out badly for investors and the market.

Most small and intermediate-size companies can be accessed only through exorbitant fees such as the “2 and 20” for venture funds and the multilayer fees for funds of funds. And what will be in it for investors? Will Wall Street share the best private deals with the public or keep them for itself and favored customers?

To broaden access to private markets, we should first restore public markets for small and medium-size companies so that all investors have an array of public and private choices. To do this, we must remove the disincentives that keep smaller companies from going public:

• Congress has interfered with public-company CEO compensation, which has led to a reliance on options and fostered semi-privatization through massive stock repurchases.

• Public-company CEOs have been burdened with unreasonable legal liabilities such as personal responsibility for the accuracy of even the minutest details in all financial statements.

• The costs of issuing public stock and regulatory compliance have become too high for any but giant companies to bear.

• Quarterly reporting and Wall Street demands for immediate “good numbers” have encouraged a short-term perspective, which may foreclose important long-term investments and thinking.

• Because so much stock investing has morphed into index investing, new public companies, which are unlikely to join an index, become orphaned. Having more public companies won’t help this situation, which requires new thinking to solve.

If I were at the SEC, I would be asking: Is it a good idea for small investors to be concentrated in a limited number of giant companies through index funds that are weighted by capitalization and that buy regardless of price? Will exchange-traded funds hold up during the next extended bear market? Their liquidity hasn’t been tested. Are investor funds safe with the few brokerages that dominate the small-investor market? Will Securities Investor Protection Corp. insurance provide enough protection?

The small investor is perennially at risk. As Malcolm Bryan, president of the Atlanta Fed in the late 1950s, said: “We should have the decency to say to the money saver, ‘Hold still, Little Fish! All we intend to do is to gut you.’ ”

But a president aggressively deregulating crypto markets won’t be bothered discussing regulations for small investor protection.

FYI: Crypto exchange collapses have led to $30–50 billion in investor losses

Globally, the crypto and virtual asset industry has seen significant defaults and bankruptcies, both among exchanges and token projects.

• Out of nearly 7 million cryptocurrencies listed since 2021, 3.7 million have failed (i.e., stopped trading or were abandoned).
• 52.7% of all crypto projects have failed, with 1.8 million failures in Q1 2025 alone.

Reasons for Token Failures:

• Lack of utility or use case
• Poor security (e.g., hacks)
• Rug pulls and scams
• Market volatility and regulatory pressure

Total Estimated Cost to Investors:

• Exchange-related losses: Over $30 billion
• Token project losses: Difficult to quantify precisely, but likely tens of billions more, especially from retail investors in failed ICOs, meme coins, and DeFi scams.

Based on the most comprehensive data available, the total estimated global investor losses from failed crypto exchanges and token projects are well over $2 trillion.

Comsure, a business risk advisory service, wrote the above last September 24. Bitcoin peaked at $124,310 on October 7. It’s now $67,530. Some people are silently crying … and praying.

US Poses Greater Security Threat Than China, Canadians Say in Poll

More than half of Canadians say the US currently poses the greatest threat to their country’s security, a stark indicator of how wide the perceived rift has become between the historically close allies.

A survey conducted by Nanos Research Group for Bloomberg News found 55% of respondents believed the US poses the most risk to Canada’s security of any country. Some 15% of respondents said China was the greatest threat, followed by 14% who pointed to Russia.

The poll was taken from Jan. 31 to Feb. 4, shortly after US President Donald Trump made a series of threats against Greenland, publicly complained about NATO and said he would be prepared to increase tariffs further on Canada. (…)

Trump’s tariffs have also pushed Canada closer to China. The two countries agreed on a deal to lower tariffs on Chinese electric cars and Canadian food products. His government is also seeking Chinese joint-venture auto investment — an unthinkable step before Trump returned to the White House.