Payrolls growth accelerated again in February

Bank of America deposit account data suggests the recovery in payrolls growth we saw in January continued into February, while unemployment payments growth remained relatively flat. But the picture on wage growth in our data was less encouraging.

We use Bank of America consumer deposit data to estimate a payrolls series by looking at how the number of customer accounts receiving a paycheck is changing. This data can be fairly noisy, partly due to seasonal variation. However, looking at a three-month moving average, Exhibit 1 suggests that the year-over-year (YoY) growth in our measure rose to 1.3% in February 2026, up from the 0.8% YoY in January.

The latest Bureau of Labor Statistics’ (BLS) payroll estimate was revised lower following the benchmark revision process. This downward adjustment means BLS payrolls growth is now estimated to be lower in 2024/25 than previously estimated, implying our estimate of payrolls growth appears stronger than the official data over the period. Nonetheless, in our view, the positive growth in our estimate is a useful directional signal, indicating that the official data may have upside growth potential in coming releases.

While the picture on stronger payrolls growth is “good news,” there is a concerning picture coming from Bank of America deposit data on households’ after-tax wage and salary growth.

One concern is that the gap between higher- and lower-income households’ after-tax wage growth is wide. In fact, in the February data, higher-income after-tax wage growth accelerated to 4.2% YoY, while lower-income after-tax wage growth dropped back to 0.6% YoY. This means the gap between higher- and lower-income households wage growth was 3.6 percentage points (pp) – the highest of any point in our data, which begins in 2015.
Middle-income after-tax wage growth fell to 1.2% YoY in February, making the gap with higher-income wage growth also the widest it has been over the length of our series.

SERVICES PMIs

China: Service sector activity expands at fastest pace since May 2023

The headline RatingDog China General Services Business Activity Index posted above the 50.0 neutral mark in February to indicate another expansion of services activity in China, thereby extending the current period of growth that commenced in January 2023. At 56.7, up from 52.3 in January, the latest rise in services activity was the strongest in 33 months.

The marked expansion in business activity was driven by a further rise in customer demand midway through the first quarter of the year. Incoming new business increased at the joint-quickest rate since May 2024, with growth generally attributed to successful promotional strategies and rising client interest. Overseas demand also rose as marketing efforts bore fruit and with greater tourism interest. The pace at which new export business expanded was the quickest in a year.

(…) cost pressures intensified in February, as average input prices rose at a quicker rate compared to January. Where input prices increased, panellists noted that this was due to higher wage and energy expenses.

Services firms also took the opportunity to raise their output charges during a period of rising demand. Average selling prices increased for the first time in three months. Although modest, the rate of output price inflation was the highest recorded since May 2024 and above the series average.

Overall, business sentiment in the service sector improved since the start of the year. Better demand conditions and hopes for further improvements in sales amid planned business development underpinned upbeat forecasts. However, the overall level of optimism remained below the long-run average amid concerns over intense competition.

The Composite Output Index posted above the 50.0 no-change threshold at 55.4 in February, up from 51.6 in January, to indicate continued business activity growth across China. Moreover, the rate of expansion was the quickest since May 2023 due to faster increases in output across both the manufacturing and service sectors.

Total new business also rose at a faster pace, supported by stronger growth in new export work. This led to a renewed accumulation of backlogged work. However, renewed job shedding was seen at the composite level amid a fresh decline in employment within the services sector.

Finally, price pressures intensified, with input costs and output charges increasing at the fastest pace in 20 and 28 months, respectively.

• The official manufacturing purchasing managers’ index fell to 49 last month from 49.3 in January, the National Bureau of Statistics said. That matched the lowest in fourth months and was worse than the median estimate of 49.2 by economists in a Bloomberg survey. The non-manufacturing measure of activity in construction and services increased slightly to 49.5, compared with a forecast of 49.7. The construction PMI declined to the lowest in six years. A reading below 50 indicates contraction.

• The private poll results have tended to be stronger than those from the official poll over the previous year as exports stayed resilient. The two surveys cover different sample sizes, locations and business types, with the private poll focusing on small and export-oriented firms.

An analysis by Bloomberg Economics showed that the official survey better reflects overall industrial production, while the RatingDog poll may provide a stronger signal on exports. The private index’s increasing volatility also risks overstating momentum shifts, the analysis found.

Eurozone growth quickens in February as demand picks up

The seasonally adjusted HCOB Eurozone Composite PMI Output Index rose to a three-month high of 51.9 in February, from 51.3 in January. The latest figure signalled an accelerated expansion in private sector business activity and stretched the eurozone’s current period of growth to 14 months. Sector level data revealed a broad-based acceleration as manufacturing production and services output levels rose at quicker rates.

Of the five eurozone countries with Composite PMI data available, business activity growth was recorded in all but France, which saw its economy virtually stagnate in February. The eurozone’s largest economy, Germany, was the growth engine midway through the opening quarter, posting its quickest upturn in four months. Solid expansions were recorded in Ireland and Italy, although a slowdown was witnessed in the former and an acceleration at the latter. Spain, often the fastest-growing eurozone country in recent years, recorded its softest rise in business activity since May last year.

Spurring eurozone growth higher was a quicker rise in new orders. A modest but accelerated increase in demand for eurozone goods and services was recorded in February, extending the current period of improving sales performances to seven months. This was reflective of growth in domestic order books, however, as new export* business shrank marginally.

The expansion in business activity outpaced that of total sales, suggesting that the completion of backlogged orders also underpinned growth in February. However, the reduction in outstanding work was only marginal and the slowest since October last year. Backlog depletion was achieved despite another month without job creation. As was the case in January, employment was virtually unchanged across the eurozone private sector.

The outlook for eurozone activity over the next 12 months was strongly optimistic. Growth expectations were historically elevated, with the level of positive sentiment ticking up slightly to its highest since May 2024. The pick-up in confidence was driven by manufacturers, whose optimism hit a four-year high in February.

Regarding inflation, February survey data signalled a notable rise in cost pressures. The rate of increase in operating expenses was its most marked in close to three years, having accelerated for a fourth month in succession. Output charge inflation eased fractionally, but was nonetheless the second-steepest in a year.

The HCOB Eurozone Services PMI Business Activity Index rose from 51.6 in January to 51.9, pointing to faster output growth compared to the start of the year. The rate of expansion was just below the long-run average of the survey, however.

Demand for eurozone services improved midway through the first quarter, continuing the trend of sales growth that began last August. New business received from non-domestic clients decreased, however, as has been the case since June 2023.

Service providers in the euro area cleared backlogs during February. That said, the rate of depletion slowed to a pace that was marginal and the weakest seen in three months. The upturn in workforce numbers continued into the latest survey period, extending the current run job creation to just over five years. Hiring was limited, however, with employment growth ticking down to a five-month low amid a slight waning of business confidence.

Sharp cost pressures remained prevalent in February. The rate of input price inflation was unchanged from January’s 11-month record. Services charges increased, albeit at a slightly softer pace than in the previous month.

Merz Says EU Won’t Accept US Trade Deal on Worse Tariff Terms

(…) “A limit has been reached of what we are willing to accept, what we can accept with regard to this disproportionate burden with tariffs,” Merz told reporters after his meeting with Trump. “We want this agreement to last and I have gained the impression that the president and his staff see it that way.”

Merz also said that the US couldn’t impose prohibitive trade measures just on Spain, after Trump threatened to cut off all trade with Madrid after the country denied access to its military bases for the American bombing campaign against Iran. (…)

On The Fog Of War & Having Second Thoughts (Ed Yardeni)

(…) The longer the war lasts, the more likely it is that the oil price shock results in stagflation. The Fed would be frozen as the risks of higher inflation and higher unemployment both increase. (…)

We’ve been expecting a pullback due to excessive bullish sentiment, but now we expect a 10% correction from the high. It’s hard to imagine that the IRGC won’t use drones and speed boats to maintain their effective blockade of the Strait. If they are successful in doing so, the correction could be closer to 15%. (…)

Notwithstanding our increasing caution about the war’s length and economic impact, we still expect it to last weeks rather than months. We are still targeting 7700 on the S&P 500 by the end of this year. We are sticking with our Roaring 2020s base case. We don’t expect a rerun of the Depressing 1970s.

For now, we are also troubled by the latest high reading of our favorite Bull/Bear Ratio at 3.61 this week (chart). We will probably turn more bullish when investors turn more bearish.

MANUFACTURING PMIs

US manufacturing growth weakest in seven months

The headline index from the report, the seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®), recorded 51.6 in February, compared to 52.4 in January. That signaled a seventh successive month that the PMI has posted above the crucial 50.0 threshold but was indicative of only a modest improvement in operating conditions that was the slowest in this sequence.

The PMI was supported in February by concurrent gains in both output and new orders. That said, the pace of growth moderated for both indices, with production rising at the softest rate since last September amid only a marginal increase in the volume of new work. According to panel members, high prices, tariffs and adverse weather weighed on both output and demand growth.

Moreover, where an increase in sales was reported, data pointed to a reliance on the domestic market as new export orders continued to falter. Exports declined for the eighth consecutive month and to the greatest degree since April 2025. Tariffs reportedly remained the primary driver behind the drop in exports, with particular emphasis on weakness in sales to neighboring Canada.

In response, US manufacturers exercised restraint in hiring in February, causing employment to rise only fractionally overall. A degree of excess capacity in the manufacturing sector also served to limit hiring, as backlogs of work declined.

Meanwhile, inventories of finished goods were unchanged in February, ending a six-month accumulation period. There was evidence that firms were looking to streamline stocks as part of cost-saving efforts given output and demand growth remained underwhelming.

Despite the muted start to 2026, firms’ assessment of future output trends was positive, with the overall degree of business optimism strengthening. The level of positive sentiment was the highest for eight months amid expectations of new product launches and business expansion plans.

Manufacturers registered a steeper deterioration in vendor performance in the latest survey period with reports of low stock availability, transportation delays and adverse weather disrupting suppliers. As a result, companies utilized input holdings, with pre-production inventories falling for the first time in seven months. At the same time, purchasing activity rose at a softer rate than in January.

Finally, tariffs and higher raw material prices remained a key source of higher input costs during February, with the latest data showing another round of historically elevated inflation – albeit slower than in January and below peaks seen in 2025. Selling prices were raised solidly, but at the slowest pace since December 2024 amid evidence of stiff competition limiting pricing power.

• ISM Manufacturing Activity Holds Up as Uncertainty Rises

The latest ISM data for February edged down just 0.2 points to 52.4 but remained in expansion, supported by strength in new orders, production, and supplier deliveries, while employment and inventories—though still in contraction—improved enough to pose less of a drag on the headline. (…)

The eye-catcher in today’s report was the near-12 point jump in prices paid with a jump in the share of respondents reporting higher prices (~45%). The release noted, “The Prices Index reading continues to be driven by increases in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods.”

At 70.5 in February, the level is just above the peaks registered early last year amid the roll-out of tariffs, but remains lower than levels reached in 2021-22. The consumer inflation signal from this move is also muted when you consider that metal prices are a big source of input cost pressure for manufacturers, but most households aren’t buying lots of metals directly. (…)

Source: Institute for Supply Management, Bloomberg Finance L.P. and Wells Fargo Economics

Of the components that do feed into the headline, three are firmly in expansion territory, led by new orders at 55.8, then followed by supplier deliveries at 55.1 and production 53.5. New orders and production both came down a bit from January and supplier deliveries rose. Take that with a grain of salt as this measure counts the wait-times and can be a bit of a head-fake during periods of supply chain disruption or trade policy uncertainty.

Employment and inventories are both still in contraction territory, but both notched modest gains from January and on that basis are less of a drag on the headline reading. Employment is now at 48.8 (up from 48.1 in January) and inventories is also at 48.8 (up from 47.6).

The employment component ultimately still indicates manufacturers remain cautious on hiring. Most respondents continue to report the same labor conditions month to month, and the report noted “The main head-count management strategies continue to be holding off on filing open positions,” emphasizing the no-hire, no-fire jobs market today. When the full February employment report is released Friday, we anticipate the economy added around 45K net new jobs, a more moderate pace than what has been registered over the past three months.

Source: Institute for Supply Management and Wells Fargo Economics

A final thought related to the recent geopolitical pressure. A theme within capex in recent years has been how the tech sector has commanded a larger share of investment. Computer and electronic products facilities in particular have seen a steep rise in orders and activity, helping offset weakness in more traditional areas of capex.

Much attention has appropriately been given to the Strait of Hormuz in the wake of this weekend’s conflict, but it is useful to keep in mind that while this shipping lane is vital for global energy markets, it is less consequential when it comes to the flow of trade in technology.

The Straight of Malacca is the primary passage for global electronics, advanced chips, critical minerals and other inputs predominantly sourced from Asia. For U.S. manufacturers, tech shipments from Asia cross the Pacific either directly to West Coast ports or routed through the Panama Canal to the East Cost. The negative effects to supply chains for high-tech capex should be limited.

Eurozone: Strongest rise in new factory orders since April 2022, but inflationary pressures build

The HCOB Eurozone Manufacturing PMI moved above the 50.0 threshold and into growth territory for the first time since August last year. Rising from 49.5 in January to 50.8 in February, the headline index signalled the strongest improvement in operating conditions faced by euro area factories since June 2022.

National level data indicated that there was breadth behind the upturn at the aggregate level. Six of the eight monitored countries saw expansionary Manufacturing PMI readings in February – the most since last November. This included Germany, which saw its sharpest improvement in factory operating conditions in close to four years. France was the only country of those six to see a slowdown on the month, with its manufacturing economy broadly stalling after a solid upturn in January. Spain and Austria were February’s outliers, posting stagnation and a marginal deterioration, respectively, when compared to the previous month.

Factory output levels rose again across the eurozone in February, marking 11 months of growth out of the past 12. A notable feature to the latest expansion, however, was that it was accompanied by a rise in new orders. Not only did demand for euro area goods improve for just the second time in close to four years during the latest survey period, but the expansion was the strongest since April 2022. Exports were less of a drag, as evidenced by a rate of contraction that was mild and the weakest for three months.

Nonetheless, manufacturing employment continued to decrease across the eurozone, in line with the trend since June 2023. With new work intakes growing, backlog depletion efforts moderated. In fact, the reduction in outstanding business volumes was the slowest in over three-and-a-half years.

Purchasing activity came close to stabilising midway through the opening quarter, with the retrenchment cooling for a second successive month. When receiving purchased products from vendors, surveyed companies once again reported delays, marking nine successive months of lengthening delivery times. Meanwhile, stocks of purchases declined further, but to the shallowest degree since the current depletion trend began in early-2023.

As for prices, the latest survey data signalled an intensification of inflationary pressures. Input costs rose sharply, with the rate of increase accelerating for a third successive month to a 38-month high. Output charges registered a back-to-back monthly rise for only the second time in almost three years, with the extent of the latest increase the most marked since March 2023.

Looking ahead, eurozone manufacturers turned more optimistic towards year-ahead growth prospects in February. In fact, business confidence rose to a four-year high.

Japan: Manufacturing PMI hits 45-month high in February

(…) Total new orders likewise expanded at a solid pace that was the fastest since January 2022. There were reports that more favourable demand conditions globally and new product releases had supported sales growth. Furthermore, new export business rose to the greatest extent since June 2021, with firms citing greater customer demand across key regions such as Europe and other parts of Asia. (…)

Higher prices for raw materials, labour and transport all drove a further rise in average input costs during February, according to panellists. A weak yen exchange rate was also cited as having pushed up expenses. While the overall rate of input price inflation eased from January, it remained sharp in the context of historical data. Companies generally responded to rising costs by raising their own selling prices in February.

The rate of charge inflation slowed from January’s 19-month high, but remained marked.

China PMIs are out tomorrow.

Canada: Manufacturing PMI hits 13-month high amid renewed improvement in order books

(…) New orders were a bright spot in February, with growth recorded for the first time in 13 months. A renewed upturn in new business reflected improving domestic demand, which helped to offset a sustained decline in export sales. Latest data indicated a solid reduction in new work from abroad, although the rate of contraction eased to its least marked since October 2025. Survey respondents again widely commented on headwinds from US tariffs. (…)

February data indicated a sharp rise in purchasing costs, with many firms noting higher prices paid for aluminum and steel. The overall pace of cost inflation was the fastest for six months. Factory gate prices increased at the steepest rate since March 2025, which was linked to rising raw material prices and the impact of passing on reciprocal tariffs.

U.S. Labor Demand Dropped in February

This is from LinkUp’s Toby Dayton:

(…) To be certain, our crystal ball is no better than anyone else’s; But we do have an alethiometer in the form of a very powerful and forward-looking dataset of job openings sourced every day directly from company and employer websites around the world that we’ve leveraged effectively to, among other things, forecast non-farm payrolls since 2010.

Looking at our U.S. data for February, total job vacancies indexed from employers globally dropped 1.7% while new job vacancies fell 5.6%. Job Openings in the U.S. are now precisely where they stood at the end of December – well below the normal hiring patterns in a functioning economy when labor demand typically rises in the first quarter of the year.

Total and new openings dropped in nearly every state.

Labor demand rose again in Manufacturing but fell in services declined in both blue and white collar occupations.

Based on LinkUp’s January data, combined with our expectation that January’s Initial Release for January will be revised down, we are forecasting a net gain of 70,000 jobs in February – slightly above consensus estimates of 60,000 jobs.

And with February’s decline in labor demand, our preliminary view is that job gains in March will be even weaker. As noted above, the U.S. job-making machine is beyond broken. It might even be beyond repair.

Xi Eyes Consumers to Lead New Era for China’s Unbalanced Economy

In coming days, President Xi Jinping and his officials will unveil the 15th Five-Year Plan, including a goal to spur a “significant increase” in consumption by 2030 — language more urgent than previous Communist Party calls on domestic spending.

With overcapacity cutting prices, a property slump eroding wealth and US President Donald Trump’s protectionist push going global, the old growth model is challenged like never before. To power the next leg of expansion, Xi must convince his nation of savers to spend more on healthcare, tourism and other services as the middle class swells to 800 million people.

Currently stuck at an estimated 41% of GDP, Bloomberg Economics forecasts consumption will grow to make up 46% of the economy by 2030. (…)

A sustained recovery in consumer sentiment and spending will require bolder policies and cohesive execution from the government, the BE economists wrote. That should include structural measures, including child and elderly care subsidies, more efforts to increase the birthrate, and anti-involution measures to boost demand and tackle deflation. (…)

While officials seem more committed in their rhetoric toward boosting consumption, it’s unclear how they’re going to achieve it. Households’ spending on goods is actually largely on par with the level seen in advanced economies — it’s just that the goods they’re consuming are often cheaper. That leaves making consumers spend more on services central to the rebalancing effort. (…)

Officials scolded by Xi for over-investing in high-tech sectors and infrastructure are now nurturing new revenue streams such as regional football leagues, tourist sites, and street food. And while there’s been glimmers of success — such as record spending over the recent Lunar New Year holiday — there’s few signs of a meaningful pick up.

There are structural, not just cyclical, reasons for the under-spending, too.

China’s social security safety net is meager, especially for those living in the countryside, which encourages so-called precautionary savings. The government’s social spending — including pensions, medical care, unemployment and low-income housing — was equivalent to 13.5% of GDP in 2024, Bloomberg calculations based on official data show, versus an average in OECD countries of 21.2%. (…)

More than 31% of disposable income is saved rather than spent, according to Bloomberg calculations based on government figures — much higher than the ratio in other major economies. (…)

Chinese leaders typically see consumption as a derivative of industrialization and development, rather than a driver of growth in itself, meaning even as they envisage an increase in consumer spending they’re also aiming to keep manufacturing’s share in the economy at a “reasonable” level in the new five-year plan.

“Old habits die hard,” said Morgan Stanley’s Xing. “We are in a period of profound global change — a multi-polar world marked by persistent geopolitical tensions, where security increasingly takes precedence over growth. This naturally reinforces the view that manufacturing is the foundation of national strength and that industrial chains must be more competitive and self-sufficient.” (…)

Per capita GDP now exceeds $13,000 and China’s middle-income group is expected to double to top 800 million over a decade. A low birth rate and population aging mean the greatest opportunity in services may lie in industries such as aged care. (…)

Qi Yunlan, a researcher with the Development Research Center of China’s State Council, identified elderly and child care, tourism and sports as among the areas where supply could be improved to encourage consumer spending. (…)

Opening up the health sector is gaining momentum, albeit gradually, as authorities look to unlock wealthy people’s demand for high-end services and tap the expanding global medical tourism market.

Last year, China’s first fully foreign-owned general hospital was launched in Tianjin. The owner, Singapore-based Perennial Holdings Pte, has developed four hotels adjacent to the institution to meet the needs of medical tourists. It also runs elder care projects with a total of over 1,800 beds in the vicinity — a model encouraged by policymakers.

To spur consumers, the government in July started providing subsidies for purchases of services including bathing assistance and rehabilitation nursing for some disabled senior citizens. It also began handing out childcare subsidies, while preschool fees are gradually being waived to ease education costs.

The initiatives fall under a new policy banner: “Investing in People,” a concept that marks a critical change in Beijing’s long-standing strategy of prioritizing capital-goods investment. (…)

FYI:

Morgan Stanley: “Historically, geopolitical risk events haven’t led to sustained volatility for equities. In fact, 1/6/12 months post these occurrences, the S&P 500 has been up 2%/6%/8% . (…) Thus, unless oil prices spike in a historically significant manner and remain elevated, recent events are unlikely to change our bullish view on US equities over the next 6-12 months.”