SERVICES PMIs
S&P Global: Services sector growth falls to lowest level since April 2025 amid weaker rise in sales
The headline S&P Global US Services PMI® Business Activity Index fell in February, decreasing to 51.7 from 52.7 at the start of the year. While indicative of growth for the thirty-seventh month in a row, the index was consistent with only a modest increase in activity that was the weakest for ten months.
New order growth extended into a twenty-second successive month but also cooled from January. Panelists reported that new client wins, and lower interest rates had helped sustain new business inflows, but uncertainty regarding tariffs and government policies limited the rate of demand growth, notably for international customers. Overall new export business recorded a marginal decline, extending the current period of contraction to three months. (…)
February data signaled a second successive monthly increase in headcounts. However, growth was largely associated with filling existing vacancies, and the gain in employment was only fractional amid reports that cost-cutting efforts had constrained hiring activity.
Meanwhile, service providers noted that labor-related expenses had been a source of increased overall operating expenses during February. Tariffs were reportedly the other key driver of higher input costs in the latest survey period. Overall input costs rose sharply in February, whilst there was an acceleration in the rate of selling price inflation. Panel members often reported that the latest increase in charges was indicative of the passing through of higher expenses to customers.
Looking ahead to the coming year, US service providers remained positive about future activity levels during February, with the degree of optimism strengthening compared to January. A hoped-for improvement in economic conditions and tax breaks was reported to have bolstered sentiment, while other firms also mentioned new project launches and associated marketing strategies.
However, the level of positive sentiment was below its long-run average as uncertainty regarding the direction of government policies weighed on sentiment.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
“February’s PMI surveys reflect increasingly tough trading conditions for businesses so far this year. Slowing demand growth from customers both at home and across export markets has been compounded by adverse weather in many states, resulting in the smallest rise in service sector activity for ten months.
“Combined with a sharp slowing of manufacturing output growth in February, waning service sector performance indicates that the economy is growing at an annualized rate just below 1.5% so far in the first quarter, though hopefully this will improve somewhat if we see a weather-related bounce back in March.
The ISM Services Index rose to 56.1, or the highest index reading in three and a half years in February. The report was good all around—activity broadened across most industries with demand conditions improving; price pressure is still high but not worsening, and some comments referred to increasing employment.
Nearly all industries reported an improvement in current conditions, with the business activity index rising to 59.9. The retail industry was the only industry that reported a drop in current activity. It also reported a decline in new orders and employment in February, signaling a cooling in retail spending after a sturdy holiday season followed by a strong January. This is consistent with what we’re seeing in high-frequency weekly retail credit card data from Bloomberg as well. We’re not overly concerned about the softness as it may reflect poor weather conditions, and incoming tax refunds should boost consumer spending in the next couple of months.
The new orders index rose further into expansion territory with 15 industries reporting increased demand last month. One respondent comment included in the note was fairly optimistic citing “stronger consumer demands, interest-rate stabilization, improved supply chain and stronger services activity.” Other comments included continued references to tariff uncertainty, cost pressure and capacity constraints while also acknowledging solid business climate and performance. Service-sector activity continues through large levels of uncertainty.
Source: Institute for Supply Management and Wells Fargo Economics
We even take the jump in the measure of inventories (+11.3) and order backlog (+11.9) as a signal of improving demand conditions after a year where most businesses operated inventory-light as a way to manage tariff uncertainty. We’ve heard anecdotally from some firms in the wake of the Supreme Court’s ruling against IEEPA tariffs that they view these next 150 days of Section 122 tariffs as a period of reprieve, both in terms of clarity and for some in terms of tariff rates. They’re importing more or bringing goods out of foreign trade zones as a result.
A larger share of respondents did, however, report feeling their inventories were too high in February, but a majority (76.6%) continue to say inventory levels are about right compared to operations. While price pressure still remains elevated throughout the services industry, the drop in the February prices paid index to 63.0 leaves it at its lowest in about a year. Sixteen industries reported an increase in costs, with no industry reporting a drop, but it is the direction of travel here that is most encouraging for broader consumer inflation. While price pressure isn’t easing, it doesn’t appear to be getting much worse.
The labor backdrop also improved marginally with the index rising to 51.8. Hiring conditions still appear mixed across industries, but one respondent comment included pointing to an expected improvement in activity boosting hiring. 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.
Canada: Services economy records further contraction of activity in February
In February, the headline Business Activity Index recorded 46.5, below the critical 50.0 no-change mark for a fourth successive month and indicative of a marked contraction in service sector output. However, by rising from 45.8 in January, the index signalled a slower decline overall.
Firms noted that client demand remained weak, characterised by uncertainty and a cautious attitude when committing to new business.
Subsequently, new orders declined again, extending the current downturn to 15 months. The rate of contraction was marked, the weakest since last October. A mixture of lower sales from both domestic and foreign clients was noted: new export business volumes declined again in February to a considerable degree.
Overall, employment declined for a sixth successive month although, like other variables measured by the survey, to a lesser degree than in January. Despite reduced capacity, levels of work outstanding were reduced, and again at a faster pace than typically recorded by the survey.
Although employment volumes were reduced, companies continued to report that labour costs remained a key source of higher operating expenses in February. Firms also noted a general increase in supplier charges. That said, input price inflation maintained its recent easing trend, dropping to its lowest level since September 2024. Output charges in contrast rose to a slightly faster degree, though inflation remained well below that of input costs.
Firms continued to signal efforts to pass on increased operating expenses to clients wherever possible.
Unpacking China’s Two Sessions: takeaways for 2026 and beyond
China’s annual target-setting is always an important event. Since GDP growth targets were first published in 1990, China has fallen short of the target only a couple of times. Generally, betting on China to miss its target has been a losing bet for forecasters.
This year’s GDP growth target was reduced to 4.5-5.0%, a slight softening from the more ambiguous “around 5%” target set in the past three years. While it was debatable how much flexibility “around 5%” entailed, most market participants viewed this as within 0.2-0.3pp of 5%.
With the new target, there appears to be a tolerance for slower growth, which should give policymakers more flexibility to pursue quality growth, a priority in recent years. Combined with China’s anti-involution drive, there will be a focus on reducing wasteful and duplicative investment while improving synergies and building on China’s long-term strategic direction. As the 15th Five-Year Plan has laid out, the key focuses are on improving industrial modernisation, improving technological self-reliance, and ramping up domestic demand.
With that said, the 4.5% threshold represents only a rather limited slowdown; China’s longer-term growth ambitions remain unchanged. The government work report outlined an intention for “laying a solid foundation for doubling per capita GDP by 2035 compared to 2020,” a key goal set by President Xi in the past. (…)
China rarely falls short of its growth target
There was little surprise in the other targets as well.
The inflation target, having been reduced to “around 2%” last year, remained unchanged. We expect inflation to rise this year to around 1% YoY, with the recent events in the Middle East potentially adding to upside risk on this number if supply disruptions persist.
The inflation target has historically not been prioritised as aggressively as the GDP target, and the final level often deviates significantly from the target. As such, we don’t expect this to play a significant role in monetary policy decision-making, where we still see a case for further easing this year.
The employment target for new urban employment has been set at “around 12 million” since 2023, while the urban unemployment target was set at “around 5.5%” since 2021, and both targets have remained unchanged. There will likely be continued focus on improving employment conditions for youth, who have suffered a disproportionately high unemployment rate in recent years amid more cautious hiring.
The fiscal targets were arguably the only area where there was a more lively debate on whether or not we’d see adjustments. While the fiscal deficit-to-GDP target of around 4% was expected to remain the same, it was unclear whether we’d see a small uptick in the bond issuance targets. This hasn’t turned out to be the case, with another RMB 4.4tn of special local government bond issuance and RMB 1.3tn of ultra-long-term bond issuance targeted this year. The report also noted that the central government will ramp up fiscal transfers to the local government.
In our view, this suggests that while growth stability remains an important objective, the stable fiscal deficit and bond issuance targets indicate a degree of restraint, avoiding relying too much on extra stimulus to drive growth at the cost of growth quality.
This may disappoint some watchers who had hoped for a stronger fiscal stimulus push. We believe there is still hope that the impact of fiscal policy could improve this year, with potentially more money available to go into the real economy rather than being used to bring off-balance-sheet debt onto the books. The government previously signalled its intent to stabilise investment growth in 2026 after 2025 saw a record low for fixed asset investment growth.
Growth target softened but other key targets left unchanged
The government work report also laid out the key objectives for the government in 2026.
In pole position is focusing on building a strong domestic market and boosting domestic demand. This sentiment has been repeatedly featured in past high-level meetings, and the government work report mentioned “special action to boost consumption” this year.
- Trade-in policy scale pared down from RMB 300bn in 2025 to RMB 250bn in 2026. One of China’s flagship policies to boost consumption has been the trade-in policy, which has been successful in bolstering beneficiary categories in the past few years. However, the peak of the impact has passed, and it looks likely to move from tailwind to headwind this year.
- Continued support for consumer credit: a RMB 100bn fund for promoting domestic demand will be established, aiming at facilitating loan interest subsidies and financing guarantees.
- Investment will be funnelled into strategic priorities, while continuing to crack down on inefficient investment. RMB 7565bn of central government budgetary investment and RMB 800bn of ultra-long-term bonds will be allocated for projects to further the key national strategies and build out national security objectives.
- Our bold call for China in 2026 could be coming to fruition as well. The government work report mentioned supporting eligible regions in promoting spring and autumn breaks for primary and secondary schools and implementing a paid staggered-leave system for employees. Staggering holidays could help bolster domestic tourism, which suffers from heavy overcrowding during national holidays, and help smooth overall consumption. We expect progress on this front to be incremental, but it is a positive sign nonetheless, as it is relatively low-hanging fruit.
Other than domestic demand, policymakers continue to prioritise creating new growth drivers through innovation and securing technological self-reliance. Key tech sectors such as AI, semiconductors, and cloud computing will likely continue to benefit from outsized investment.
China has come under increasing pressure from abroad, as its trade surplus surged to nearly USD 1.2tn in 2025. In order to address these issues, there was mention of actively expanding imports to promote a more balanced trade development, as well as aiming to sign more bilateral trade and investment agreements. The stronger CNY thus far this year could help contribute to this process.
China continues to open up aspects of its economy. In 2026, the focus includes expanding market access for the services industries, where a pilot zone for the services sector opening up will be established. The government work report signals further opening up telecom, biotech, and healthcare sectors. There will also be pilot programmes to open up the digital sector. In order to continue to attract foreign investment, China will aim to guarantee national treatment for foreign investments and promote two-way investments.
China’s Five-Year Plans often give insight into the longer-term priorities and can be seen as setting the framework for future policy direction.
For the current Five-Year Period of 2026-2030, the government work report highlights four strategic priorities:
- Promote high-quality development: a focus on quality continues to emphasise scientific and technological innovation, building a modern industrial system focused on advanced manufacturing and green development. The plan targets the digital economy to reach 12.5% of GDP, and for R&D expenditure to grow by 7% per year over the current five-year period.
- Strengthening the domestic economy: amid external uncertainties, strengthening domestic demand is of high importance. The plan calls for significantly boosting consumption, eliminating local protectionism, and investing in improving the goods and services sectors.
- Promote common prosperity: encourage fertility and address population ageing, improve education, elderly care, promote quality employment, improve income distribution, and strengthen the social security system.
- Coordinate development and security: targeting various aspects of national security, such as food security, energy security, and resolving key risks, such as the property market and local government debt.
What does this mean for China’s economy? The trends we have seen in the past few years are likely to continue, with an increased focus on moving up the supply chain and improving tech self-reliance. The big question mark will be how successful China is in boosting its domestic demand, as domestic confidence remains tepid and continues to restrain this effort.
