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With the Iran conflict, geopolitical risk has soared to alarming levels

Michael J. Moran

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The services index published by the Institute for Supply Management rose 2.3 index points in February to 56.1, signaling solid expansion in the service sectors of the economy. February marked the 20th consecutive month with a reading above the 50 threshold (which separates expansion from contraction), and it was the firmest reading since mid-2022. The increase in the index was broadly based, as three of the four components contributed positively, and all were above the 50 threshold.

The supplier delivery index was the only component that did not boost the headline measure, and its monthly change was minuscule (off 0.3 index point to 53.9). The dip, and the relatively low reading on this measure, could be viewed in a positive light, as the new information suggests that supply-chain problems are not an issue at this time.

The new orders index made the largest contribution to the advance in the headline measure, jumping 5.5 points to 58.6, moving to the upper end of the range of the past few years. With order flows firm, business activity remained brisk, as this component rose 2.5 points to 59.9. Business activity recovered quickly from the pandemic and has been above 50 since June 2020. The latest reading was in the upper portion of the range in place since 2022. The employment index was a bit of a laggard, as it rose only 1.5 points, and its level of 51.8 was light relative to the other components. Still, the latest reading was encouraging, as it marked the third consecutive month above 50, representing a break from the sub-50 results that were common in 2024 and 2025.

The prices index, which is not a component of the headline index, fell 3.6 points to 63.0. The elevated level is a concern, but it is not a shocking result, as this measure runs high relative to the other indexes in this report. Observations above 70 have occurred several times in years past, and the index was above 80 for most months during the inflation burst of 2021-22. Although still elevated, the prices index seems to be easing, as February marked the third decline in the past four months, and the measure is now noticeably shy of the 69.5 reading in October of last year.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector; below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- Headline index for February jumped to a multi-year high.
- Three of the four components contributed positively.
- The prices index, although still elevated, eased.

ISM Services: Favorable News from Every Perspective

Winnie Tapasanun

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U.S. nonfarm private sector payrolls rose a larger-than-expected 63,000 (0.2% y/y) in February after increases of 11,000 in January (+22,000 initially) and 37,000 in December (unrevised), according to the ADP National Employment Report. February’s m/m gain was the biggest since November. The three-month average change was +37,000 in February, smaller than +41,000 in January and +44,000 in December. The Action Economics Forecast Survey expected a 43,000 increase in February.

Small business hiring (less than 50 employees) climbed a solid 60,000 (0.5% y/y) in February—the largest m/m rise in four months—following a modest 1,000 increase in January (no change initially), with employment in very small firms (1-19 employees) up 58,000, the strongest m/m gain since October, and employment in small firms (20-49 employees) up 2,000. Employment at medium-sized firms (50-499 employees) fell 7,000 (-0.5% y/y) in February, the first m/m fall in three months, after a 29,000 rise in January (+41,000 initially). Large business hiring (500+ employees) rebounded 10,000 (1.0% y/y), the eighth m/m increase in nine months, following a 19,000 January drop (-18,000 initially).

Service-producing jobs advanced 47,000 (0.4% y/y) in February after an 11,000 gain in January (+21,000 initially), marking the ninth straight m/m increase and the largest in three months. February’s rise was led by education & health services (+58,000), followed by information (+11,000), other services (+6,000), financial activities (+2,000), and leisure & hospitality (+1,000). To the downside, m/m employment fell in professional & business services (-30,000) and trade, transportation & utilities (-1,000).

Goods-producing employment rose 16,000 (-0.5% y/y) in February, the first m/m rise in 10 months, after no change in January (+1,000 initially). February’s gain was driven by construction (+19,000) and natural resources & mining (+2,000), while manufacturing (-5,000) continued to decline.

By region, nonfarm private payroll employment increased m/m in the South (+37,000; +0.3% y/y), West (+19,000; +0.3% y/y), and Northeast (+11,000; +0.5% y/y). In contrast, employment fell m/m in the Midwest (-4,000; -0.1% y/y).

Wage growth for job changers eased to a three-month-low 6.3% y/y in February from 6.4% y/y in January, remaining far below a high of 16.1% in April 2022. Wage growth for job stayers held steady at 4.5% y/y in February, holding in a narrow 4.4%-4.5% range since April 2025. Pay growth also remained steady in major industries, including financial activities (5.2% y/y), construction (4.7% y/y), professional & business services (4.3% y/y), and other services (4.1% y/y).

The ADP National Employment Report and Pay Insights data can be found in Haver's **USECON** database. Historical figures date back to January 2010 for private employment. Pay data date back to October 2020. The expectation figure is available in Haver's **AS1REPNA** database.

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- Private payrolls +63K, eighth straight m/m gain and largest in three months.
- Hiring increase is driven by small businesses (+60K, strongest in four months).
- Service-sector jobs up (+47K), led by education & health svs. (+58K) and information (+11K).
- Goods-producing jobs up (+16K), driven by construction (+19K).
- Wage growth eases y/y for job changers (6.3%) but steady for job stayers (4.5%).

U.S. ADP Private Employment Growth Accelerates in February, Exceeding Expectations

Robert Brusca

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The composite PMIs showed modest increases on their full sample average and a modest step-back in the full sample median calculation in February. However, the number of areas below 50 fell to 4 in February; that count was only 5 in January, and there were none showing declines in December, so there's a great sense of progress in place. The proportion of reporters in February that were getting worse was only 40%, compared to 44% in January and 76% in December. So there has been a change for the better in terms of the proportion of these 25 reporters who are registering better growth month to month in the last two months, in particular.

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**U.S. data are a curve ball to this month’s readings**
However, the United States, the largest economy globally, also issued a competitor report in the last few days, the ISM. Its manufacturing sector reading made a small step-back in February but is still on a rising trend. The U.S. ISM services index was up strongly in February, a very different reading from that in the S&P (see the comparisons below).

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**S&P Global data**
Beyond the monthly data, the sequential data show the full-sample averages getting better from 12 months to 6 months and then slightly weaker from 6 months to 3 months. However, the all-sample median shows an improvement in 6 months compared to 12 months, and another small improvement in 3 months compared to 6 months.

The bottom line on this is that there's a lot of mixed performance, and conditions are broadly in flux; in terms of better or worse, overall conditions are not particularly changed from 12 months to 6 months to 3 months. The monthly data show a better sense that there's progress underway, and this is perhaps a very interesting phenomenon, especially because these are data through February, before the attack on Iran was consummated. 

**War Intrudes on Economics**
The execution of war generally isn’t good for economies; however, in this case, the strike was quick, and although there had been a buildup in U.S. armaments—which, in some sense, meant it was expected—the specific timing of the attack was a surprise. It caught Iran completely off guard and made the strike exceptionally successful. Since Iran had lost most of its air cover and its previous war with Israel, its facilities were pretty well laid bare and very quickly the U.S. and Israel claimed air superiority. They have used that to continue to advance their attacks on strategic targets in an effort to achieve the results that the U.S. has said it wants which are (1) to stop Iran's nuclear program, (2) to stop its development of long and intermediate range missiles, and (3) to stop Iran in its role as a sponsor of terror in the Middle East. It may well be that none of these objectives can really be achieved by an air war, and it's not clear that there are any plans to put boots on the ground. However, the air attacks are also aimed at degrading the hold of the ruling party over its citizenry, making it possible for them to rise up and replace the government with one of their choice.

**An Untried Strategy**
This strategy is, as far as I can tell, completely untested. In the past, when a major power interfered in the affairs of a country, it would generally sweep in with the ground attack, make sure that the existing government was fragmented, and basically install the government of their choice even though they would also characterize it as ‘the government of the people.’ This does not seem to be the strategy this time, and it follows more or less the script that the U.S. put in place for Venezuela, where it seized the president who had been sought for various crimes in America and pulled him out of the country. After a brief attack that was necessary to make that capture successful, the U.S. simply left Venezuela behind to settle its own affairs.

**Market impact is muted**
As a result of this unusual tactic, we see some increase in oil prices, but they have not spiked tremendously, and the U.S. is currently offering to provide protection for ships that pass through the Strait of Hormuz. Newspapers report how there is a broadening of the conflict, but I don't see it that way, because it's hard to imagine a war of this nature in the Middle East that wouldn't draw most of the Middle East participants into it as at least collateral damage. What we are seeing is that Iran is desperately trying to shoot at any of its Arab neighbors in an effort to harm them and get them to put pressure on the U.S. to stop its attack. Most recently, Iran launched an ‘attempted attack’ on Turkey, which is a NATO member. But there doesn't seem to be much chance that the actual hostilities are spilling out of the Middle East or that Iran has much of a reach to do more than what it's been doing; its capabilities seem to be narrowing every single day.

**Where the PMI Data Stand**
The PMI data for February also showed that only nine of the twenty-five members have queue percentile standings of their composite indexes that are below the 50% mark, indicating there was economic contraction in play. Quite a number of countries are showing queue percentile standings of their composite PMIs that are above their 70th percentiles. And we want to take these totals with a grain of salt partly because the U.S. has just reported out such strong data.

**Summing up**
On balance, it appears that the war being conducted in Iran has caught the global economy on a bit of an economic upswing, and we'll have to see to what extent that is affected or interrupted by the conduct of war, especially since this combat appears to be so well contained. A number of analysts talk about how this war is increasing uncertainty in the area. In my opinion, this is a knee-jerk improper reading of the situation. It seems to me that a successful attack that successfully reduces the impact of Iran in the Middle East as a sponsor of terror, as the developer of a nuclear program, and as a possessor of long range and intermediate range missiles—and that creates the potential for a different civilian government to take over—has actually increased certainty - and the prospect of peace - quite a lot. The view that uncertainty has been elevated is an extremely short-term view that I think will quickly be dominated by the notion that uncertainty has actually been reduced and that world conditions have been improved.

S&P Composite PMIs Show Recovery Progresses

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Inflation in the European Monetary Union picked up in February, ahead of the beginning of new hostilities in the Middle East. The increase in the harmonized index of consumer prices moved up to 0.3% in February from 0.1% to January. Progression on the annual rate of price increase moved up to 1.9% over 12 months, to a 2.1% annual rate over six months, and to a 2.4% annual rate over three months.

This is a modest acceleration and not something to get particularly excited about, except that with new hostilities in the Middle East, oil prices have begun to rise significantly, and there will be apprehension about how much more there is to come. However, the initial oil price reaction was muted, and the follow-up price reaction has also been relatively muted so these will translate into a nontrivial impact on inflation and in the harmonized index for consumer prices in the monetary union, as well as in the key prices watched by central banks globally.

**Big Four Economies**
The Big Four economies in the monetary union produced scattered results in February. Germany produced no increase in its February HICP. The HICP for France jumped by 0.4% month-to-month. Spain showed an increase of 0.2%; Italy reported an outsized increase of 0.7% in February. Still, the January and February data for this group of countries show prices mostly very well behaved. If we simply multiply these 12 increases (four countries over three months) together we get prices rising at a 2.2% annual rate across all the countries over the three months. That is close to target. 

**Annual and Sequential Big Four Inflation**
Inflation for the Big Four economies ranges from a top pace of 2.4% in Spain to the lowest pace of 1.1% in France with Italy's 1.6% and Germany's on-target 2% making up middle cases. Even the biggest price increase from Spain at 2.4% is not particularly frightening. Inside of 12 months looking at the six- and 3-month trends, Germany's trends move up to 2.6% over six months and then down to 1.2%. France's 6-month inflation remains at 1.1% over six months but then moves up to a 1.9% annual rate over three months. Italy's 12-month pace of 1.6% holds in place over six months, but then the 3-month inflation rate jumps to a 4.1% annual rate. For Spain, the 2.4% 12 month rate rises to a 3% annual rate over six months and then falls sharply to a 1.6% annual rate over three months.

**Headline vs. Core Inflation**
Headline inflation rates, of course, are mercurial because of the impact of oil prices on them. Two early reporters gave us core inflation or ex-energy inflation rates. In the case of Spain, core inflation is stuck at 2.7% on all horizons. Germany's index excluding energy is at 2.4% over 12 months, but then Germany’s six-month pace falls to 2.2%, and its three-month pace falls again to 1.7%. In the case of Germany, 12-month ex-energy inflation is mildly acceptable, but progressing to the three-month horizon, the inflation rate drops back well into place. For Spain, the 2.7% 12-month inflation rate persists across all horizons and is unacceptably high.

**Longer Trends**
Inflation is generally behaving and riding downtrends in the monetary union, with 12- month inflation generally lower than 12-month inflation was a year ago. That is true for all the major metrics in the table except two. The first exception is France when the 12-month inflation rate is 1.1% compared to 0.9% over 12 months a year ago (still, obviously very well behaved). In the case of Spain, core inflation moves up to 2.7% over 12 months after being at 2.2% just a year ago.

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**Events**
The inflation data this month show results we would more or less take in stride if it weren't for conflicts in the Middle East that are having a fresh upward effect on energy prices. We expect that to be reflected in next month’s inflation reports. Next month’s anticipated bad reaction will stack on top of this month when results came in worse than expected. For the most part, headline inflation is very close to its mark; however, core inflation shows signs of being stubborn and stuck at levels that are either slightly or more decidedly too high. This, of course, is a phenomenon we see in the United States with inflation stuck close to the 3% level, a percentage point above the Fed’s target. Europe’s situation is not unique.

**Oil and War: A Nasty Combination**
Since we're mostly talking about oil, it's highly likely that the European Central Bank is not going to be very concerned about these numbers because they're coming out of a state of warfare, and because, generally speaking, the inflation numbers are relatively close to target. Moreover, GDP growth rates right now are not particularly impressive. Unemployment rates are low across the euro area despite weak growth; there's no problem with the employment side of the equation. Monetary policy in an environment like this is going to be the product of the discretion of central bankers who are going to show us what they're worried about most and whether they're worried about disturbing the already weak rate of growth in their economy. Or are they going to be more committed to getting inflation down to target, a target they've been at least mildly missing for some time? Having war as the active ingredient in the inflation mix may be the deciding factor to keep the central bank on the sidelines. However, central bankers also know that ignoring an upturn in inflation whether it's caused by commodity prices, oil or something else is not a recipe for good monetary policy. For that reason, markets should be on alert in the coming months.

Inflation in Europe Picks Up – Ahead of Hostilities

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The ISM U.S. manufacturing PMI dipped to 52.4 in February, the fourth m/m decline in five months, after a 4.7-point rebound to 52.6 in January, data from the Institute for Supply Management showed. The February reading, above the 50 expansion-contraction dividing line, indicated the U.S. manufacturing sector expanded for the second successive month and only the third in 40 months. A reading of 51.8 for February had been expected in the Action Economics Forecast Survey. The February manufacturing PMI, while above 50.0 in February 2025 and a low of 47.0 in October 2024, remained below a peak of 63.8 in March 2021.

The production index fell to 53.5 in February from 55.9 in January (the highest level since February 2022), indicating production expanded for the fourth consecutive month but at a slower pace. The index was above its recent low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In February, 25.2% (NSA) of respondents reported higher production while 16.0% reported lower production. The new orders index declined to 55.8 in February from 57.1 in January (also the highest level since February 2022), signaling new orders expanded for the second straight month following four successive months of contraction. The index remained well above a low of 41.8 in January 2023. In February, 30.3% (NSA) of respondents reported higher new orders while a reduced 12.8% reported declines. The inventories index increased to 48.8 in February from 47.6 in January, marking the 10th straight month of contraction. The index was below its recent high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index rose to 55.1 in February from 54.4 in January, indicating slower delivery performance for the third consecutive month after faster deliveries in November. In February, 14.0% (NSA) of respondents reported slower delivery speeds while 3.8% reported faster speeds.

On the labor front, the employment index increased to 48.8 in February from 48.1 in January, showing that employment contracted for the 29th straight month after a brief expansion in September 2023; however, February’s contraction was the slowest since January 2025. The index was above its recent low of 44.1 in November 2025 but below its recent high of 49.7 in January 2025 and a high of 56.5 in March 2022. In February, 18.8% (NSA) of respondents reported higher employment while 20.4% reported less hiring.

On the pricing front, the prices paid index jumped to 70.5 (NSA) in February from 59.0 in January, indicating raw materials prices rose for the 17th consecutive month and at the fastest pace since June 2022. The index remained well above a low of 39.4 in December 2022 but significantly below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. An increased 45.4% (NSA) of respondents reported higher prices in February while only 4.4% reported price declines.

In other ISM series not included in the composite index, the new export orders index edged up to 50.3 in February from 50.2 in January, indicating new export orders expanded for the second successive month following 10 months of contraction. The index was up from a low of 40.1 in May 2025 but down from its recent high of 52.4 in January 2025 and a high of 57.1 in February 2022. The imports index rose to 54.9 in February from 50.0 in January, suggesting imports expanded the first time since March 2025 and reached the highest level since February 2022. The index was above a low of 39.9 in May 2025. The order backlog index advanced to 56.6 (NSA) in February from 51.6 in January, showing that backlog levels expanded for the second straight month and hit the highest level since May 2022. The index was well above a low of 37.5 in May 2023 but far below a peak of 70.6 in May 2021.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- ISM Mfg. PMI at 52.4 in Feb.; second consecutive month of expansion and only the third in 40 mths.
- Production (53.5) expands for the fourth straight mth.; new orders (55.8) expand for the second successive mth.
- Employment (48.8) contracts for the 29th straight mth. but at the slowest pace since Jan. ’25.
- Prices Index (70.5) hits its highest since June ’22, w/ prices rising for the 17th consecutive mth.
- Exports (50.3) expand for the second straight mth.; imports (54.9) reach the highest level since Feb. ’22.

U.S. ISM Manufacturing PMI Slips in February, Still Indicating Expansion

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The S&P manufacturing PMI readings for February 2026 continued to show improvement, particularly on a sequential basis.

The chart shows a clear upward tendency for the United States, Japan, and the European Monetary Union where the manufacturing PMIs have been on an increasing track for some time. Japan just surpassed the U.S. this month where the manufacturing PMI reading surged above 50. The U.S. has been steady at that level for a number of months; Japan has just moved up while the euro area reading is starting to show some upward trend.

The table takes the underlying diffusion levels reported by these 18 early reporters and shuffles them into six different cohorts to summarize their performance over different periods.

In February, we see twice as many reporters in the cohort between 55 and 60 as we saw in January; that proportion moved up to 11.1% from 5.6%. The proportion in the 50 to 55 diffusion category (mild improvement) was unchanged at 55.6%; the proportion showing mild below median performance declined to 33.3% in February from 38.9% in January. The other cohorts showed no membership.

If we look at the data grouped into sequential categories of three-months, six-months, and 12-months, we see the neutral to mildly positive category of 50% to 55% moving from 28.2% of total membership over 12 months to 39.8% of membership over 6 months to 55.6% membership over 3 months. This is a clear improvement in performance over this timeline for the category indicating moderate expansion. The stronger expansion category of 55 to 60 shows a membership of 5.6% for all three-time horizons. The category showing weak declines in the 40 to 50 range for diffusion declined steadily from 66.2% over 12 months to 54.6% over 6 months to only 38.9% over 3 months. Over the last three months, fewer than 40% of the reporters were showing mild declines, 55% of the reporters were showing unchanged-to-moderate increases, while relatively larger increases have been posted by 5.6% of the reporters.

Looking back to the right of the table, we can compare the recent 12-month figures to the previous 12-months and to the 12-months before that to get a sense of the smoothed trend. There what we see is the 50 to 55 category three years ago was at 28.2% of the reporting membership; it moved up to 38% of the membership over just a year ago whereas over the past year that membership had slipped to 28% in an environment where tariffs were imposed. Although, as we see from the sequential data, it has over the shorter periods of six months and three months been seeing an increase in membership in that category.

Over the earlier years, there was also stronger membership in the stronger growth category of 55 to 60 percentile. Three years ago, it registered 8.3%, then fell to 6.4% and now sits at 5.6% over the recent 12 months. Over the recent shorter periods of three months and six months, there has yet to be an improvement in that category. As for the weaker category the cohort from 40 to 50%, we see 62% of the membership in that category three years ago, and two years ago that had fallen back to 55.6%, but then over the past year it had moved up to average 66% of the membership: fully 2/3 of the reporting membership over the last year has been in the 40 to 50 the diffusion category though that membership proportion has been falling over the last six and three months.

The grouped statistics show that there is general progress in place and in line with what we see reported in the chart. In addition, we track the number of reporters That are improving period to period. From 12 months to six months to three months, we see that percentage of reporters showing higher diffusion readings steadily improving from 50% to 61.1% to 77.8%. We also track the number of reporters with diffusion below 50 (that is those that are showing contraction) and that number hasn't changed very much; it's at 13 over 12 months and over 6 months while falling only to 12 over 3 months.

However, if we step away from averaging and we look at the raw scores for the last three months, we see the number of countries reporting output that's contracting at 8 in December, at 7 in January and at 6 in February, a clearer sense of progress. Meanwhile, on the monthly timeline, there's also a sense of improvement - not in a monotonic sense – but there is a hint of better general tendency for the percent of reporters that are showing the tendency for higher diffusion to be reported to rise.

The diffusion statistics are up to date, and they basically describe the proportion of the reporters that are seeing activity improve or decline in the reporting area. Diffusion data don’t tell us how strong that improvement is, just whether it's present. Diffusion data tend to be sensitive. They tend to quickly be able to identify changes in trends and right now we're seeing an uptick, an improvement, in the levels of diffusion being reported in this 18-country sample for manufacturing. The results are not decisive, but they are encouraging.

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S&P Manufacturing PMIs Show Improvement

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The headline PPI and its components sometimes move erratically, and that was certainly the case in January. The headline index (so-called final demand PPI) jumped 0.5%, one of the firmer readings of the past few years. However, a quick review of the detail in the report shows that marked changes in frequently noisy areas accounted for most of the pressure. Without such noise, the headline measure would have increased moderately, perhaps 0.1% or 0.2%.

Prices of food and energy are well known to move erratically, and they showed noticeable downside changes in January (off 1.5% and 2.7%, respectively). However, the highly volatile trade services category provided an offset with a surge of 2.5%, the sharpest monthly increase on record (data back to 2010). The Bureau of Labor Services is well aware of the volatile nature of these areas and offers an index excluding food, energy, and trade services to provide a perspective on underlying trends. This measure rose 0.3% in January, in line with other recent month-to-month changes. The year-over-year increase of 2.9% was comfortably within the recent range of observations (2.7% to 3.2% since mid-2025).

The change in prices excluding food, energy, and trade services seems tolerable in that it is comparable to other recent readings. However, some observers will highlight the uncomfortable rate of increase (3.0% versus a benchmark of 2.0% in the minds of many). Also, the sideways nature of the year-over-year change suggests little prospect of deceleration.

These points are well taken, but additional detail in the report offered a hint of softness. Another volatile item in the service category (transportation and warehouse services) rose 1.0% in January. This measure does not match the volatility in trade services, but it often shifts erratically. For example, last year this component rose 1.4% in one month and more than 0.5% in four other months, yet the average for the year was 0.2%. Future readings are likely to be well shy of the January advance.

An increase of 1.2% in the construction component also looks suspicious. This figure is reported to be seasonally adjusted, but there is a strong tendency to post high-side increases in the first month of a quarter. Observations in the next two months are likely to be noticeably softer, and the average for the year most likely will be well shy of 1.2%. The average increase last year was 0.2%.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Prices of food and energy fell sharply, while prices of trade services surged.
- Other noisy areas (transportation & warehouse services, construction) posted high-side increases.
- Excluding the (apparently) random shifts, results were tame.

January PPI: Wild Swings in Volatile Areas

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The value of construction put in place rose a slightly-more-than-expected 0.3% m/m in December to a seasonally adjusted annual rate of $2,168.8 billion, reversing declines of 0.2% in November and 0.1% in October (+0.5% previously), data from the U.S. Census Bureau showed. December marked the first m/m gain since August and the highest level in three months. A 0.2% m/m increase had been expected in the Action Economics Forecast Survey for both November and December. The year-on-year rate was -0.4% in December following -1.4% in November, registering the 11th consecutive y/y decline. The latest y/y figure compared with a flat y/y reading in December 2024, remaining well below a high of 12.9% in December 2023 and a peak of 18.4% in April 2022. For all of 2025, construction spending fell 1.4% after gains of 5.7% in 2024 and 9.1% in 2023.

Private construction rebounded 0.5% (-1.5% y/y) to $1,647.1 billion in December, the first m/m gain in four months, after decreases of 0.2% in November and 0.1% in October (+0.6% previously). Residential private construction advanced 1.5% (-1.3% y/y) to $916.2 billion in December, the first m/m rise since August, after no change in November. Single-family building climbed 1.6% (-3.6% y/y) following a 0.6% November increase and eight straight m/m declines; it was 45.5% of the residential private construction. Multi-family building edged up 0.1% (2.9% y/y), the sixth m/m increase in seven months, after a 1.1% November rise; it was 12.7% of the residential private construction. Home improvement building recovered 1.8% (0.0% y/y), up the second time in three months, after a 1.0% November drop; it was 41.8% of the residential private construction.

Nonresidential private construction fell 0.7% (-1.8% y/y) to $730.9 billion in December, the third successive m/m fall and the fifth in six months, on top of a 0.5% decline in November. The December decrease reflected m/m drops across several nonresidential private construction categories, led by manufacturing (-2.5%; -11.4% y/y), followed by religious (-1.7%; +8.5% y/y), amusement & recreation (-1.1%; +7.9% y/y), health care (-0.8%; -3.7% y/y), commercial (-0.4%; +0.3% y/y), educational (-0.4%; +5.2% y/y), lodging (-0.2%; -1.1% y/y), and communication (-0.1%; -0.8% y/y). To the upside, nonresidential private constructions for utilities (+0.8%; +6.4% y/y) and office (+0.5%; +3.3% y/y) rose m/m in December. Meanwhile, transportation private construction was virtually unchanged (+4.6% y/y) after a 0.4% November decline.

The value of public construction fell 0.5% (+3.5% y/y) to $521.7 billion in December after m/m declines of 0.2% in November and 0.1% in October (+0.1% initially), reflecting drops of 2.7% (+9.1% y/y) in residential public construction and 0.4% (+3.4% y/y) in nonresidential public construction. Several nonresidential public construction categories declined m/m in December, led by water supply (-2.2%; +8.8% y/y), followed by public safety (-1.0%; +3.8% y/y), educational (-0.8%; -1.4% y/y), commercial (-0.6%; +7.3% y/y), transportation (-0.4%; +5.5% y/y), health care (-0.3%; +7.1% y/y), office (-0.3%; -2.6% y/y), and conservation & development (-0.1%; +8.7% y/y). Notably, spending on highways & streets, which accounted for 27.1% of public construction spending, slid 0.3% (+0.8% y/y) in December following a 0.4% rebound in November. In contrast, public constructions for utilities (+1.2%; +1.8% y/y), amusement & recreation (+0.5%; +4.6% y/y), and sewage & waste disposal (+0.3%; +14.2% y/y) gained m/m in December. 

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- Headline +0.3% m/m, first m/m rise since August; -0.4% y/y, 11th consecutive y/y fall.
- Residential private construction +1.5% m/m, led by a 1.8% rebound in home improvement building.
- Nonresidential private construction -0.7% m/m, fifth m/m decline in six months.
- Public construction -0.5% m/m, reflecting drops in both residential & nonresidential public buildings.

U.S. Construction Spending Rebounds in December After Three Straight M/M Declines

Sandy Batten

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Nonfarm payroll employment (from the survey of establishments) unexpectedly fell by 92,000 in February with downward revisions to December and January, according to today’s report from the Bureau of Labor Statistics. The Action Economics Survey expected payrolls to increase by 63,000. The 130,000 monthly increase previously reported for January was revised down to 126,000 while the 48,000 gain previously reported for December was revised down to a 17,000 decline. Over the past three months, nonfarm payrolls have averaged a 6,000 monthly increase. Over the past six months, payrolls have averaged a 1,000 monthly decline. So, clearly labor market conditions have softened.

The meaningfully weaker payroll report was reinforced by a 203,000 increase in the number unemployed from the **household survey**, which led to a 0.1%-point increase in the unemployment rate. The labor force participation rate continued its downtrend by falling to 62.0% in February, the lowest reading December 2021, from 62.1% in January. Household employment fell by 185,000, its first monthly decline since July. Unseasonably cold weather did not appear to be a meaningful factor behind the drop in employment. The survey reported that 228,000 employed workers could not get to work because of the weather. This not seasonally adjusted figure was not unusually high for this time of the year and in fact was about half the size of the figures reported last January and February.

Today’s report contained the annual population adjustments for the household survey figures. These adjustments are usually released with the January figures that are released in February. However, the shutdown of the federal government in October and early November last year delayed that release. As widely expected, the population adjustment this year was extremely large and negative (-1.4 million for the labor force), reflecting the marked decrease in immigration that has occurred over the past year with the changes in immigration policy. Note that this adjustment is only made on 2026 household data. So, any comparison of current household data with that in previous years would be an apples-to-oranges comparison. However, Haver Analytics calculates population-adjusted household data for the major aggregates. They are in the USECON database.

Growth of average hourly earnings (AHE), a key variable for the Federal Reserve, picked up slightly in February. AHE increased 0.4% m/m, slightly above the expected 0.3% monthly gain. The y/y rate of advance edged up to 3.8% in February from 3.7% in January. Wage growth in private service-producing firms was unchanged at 3.7% y/y while goods-producing wage growth rose to 4.2% y/y, the highest rate since May, from 4.0% y/y in January. The current pace of total AHE growth is likely to be still a little too fast to be consistent with the Fed’s 2% inflation target, although continued solid productivity growth could restrain some of the inflationary impact of the current pace of wage growth.

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In the **establishment survey**, private-sector employment fell 86,000 in February, the weakest reading since December 2020. The Action Economics Forecast Survey looked for an 85,000 increase. Moreover, figures for both December and January were revised lower. The 172,000 increase previously reported for January was revised to 146,000 while the 64,000 rise previously reported for December was revised to a 7,000 decrease. Government employment fell 6,000, the fifth consecutive monthly decline.

Goods-producing employment declined 25,000 in February following a 51,000 jump in January. Construction employment slumped 11,000, likely adversely affected by the unseasonably cold weather, after a surprising 48,000 jump in January. Manufacturing jobs fell 12,000 in February following a 5,000 gain in January. Manufacturing employment fell in each month in 2025, not the result that the Trump Administration new tariff policy had intended. Private service-producing employment fell 61,000, its first monthly decline since last June. Healthcare and social assistance employment, which had previously been a major support for overall employment, fell 18,600 in February, its first monthly decline since January 2022. However, part of the February decrease reflected 31,000 striking nurses in California during the survey period. Monthly declines were widespread across the service-producing sector while any gain was extremely small. Leisure and hospitality employment fell 27,000 in February on top of a 12,000 decline in the previous month.

The length of the workweek was unchanged at 34.3 hours in February. Also, aggregate weekly hours were unchanged in February. The goods-producing workweek edged up to 40.1 hours, the highest since January 2023, while the private service-producing workweek was unchanged at 33.2 hours in February.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Nonfarm payrolls fell 92,000 in February with downward revisions to both December and January
- Private sector payrolls fell 86,000 in February.
- Average hourly earnings annual growth increased to 3.8% from 3.7% in both December and January.
- Unemployment in the household survey increased 203,000, pushing the unemployment rate up to 4.4% from 4.3% in January.
- The delayed population adjustment to the household data was a very large negative as had been expected given the observed declines in immigration.

U.S. Employment Unexpectedly Fell in February

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