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.
