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.

• ISM Services Signals Broad Improvement in Demand Conditions

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:

1. 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. 
2. 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.
3. 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. 
4. 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.

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.