Solid Jobs Report, but Mixed Data Bring Up Questions on U.S. Economic Growth
U.S. employers added 151,000 new jobs to the economy in February, below the 170,000 estimate. The unemployment rate edged higher to 4.1% and average hourly earnings growth came in at an annualized rate of 4.0%. The federal government shed 10,000 jobs last month, but most DOGE cuts were announced after the reporting period and should be reflected in the March report. A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons jumped 50 basis points to 8.0%, its highest level since October 2021.
The PCE Price Index, the Federal Reserve’s preferred inflation measure, increased 0.3% month-over-month (M/M) in January or 2.5% year-over-year (Y/Y). Core PCE also rose 0.3% M/M, but the annual rate of 2.6% fell from 2.9% in December. Headline CPI came in at an annual rate of 2.8% in February and 3.1% for Core CPI. The Fed prefers PCE over CPI because it is broader-based, adjusts for changes in consumer behavior, and places less emphasis on shelter costs.
Retail sales dropped 0.9% in January, the biggest decrease since March 2023, after an upwardly revised 0.7% increase in December. Retail sales increased 4.2% Y/Y in January. Two major snowstorms and the California wildfires were cited as reasons for the weaker than expected report, but concern over inflation and tariffs could also be to blame. Durable goods orders rose more than expected in January with a M/M gain of 3.1%. Transportation equipment drove the outsized gain; when removed, new orders were flat. A proxy for business spending in the GDP increased 0.8%.
U.S. manufacturing remained in expansion territory in February with the ISM Manufacturing PMI coming in at 50.3 (down from 50.9 in January). New orders, production, and employment all weakened, but prices surged higher. The ISM Services PMI rose from 52.8 in January to 53.5 in February. Although production softened slightly, new orders and employment expanded. Businesses cited anxiety over tariffs and spending cuts.
Source: U.S. Bureau of Labor Statistics
ECB Cuts Rates Again to Combat Sluggish Economic Growth Outlook
The eurozone composite PMI was unchanged in February. The headline reading was 50.2 and the underlying services component weakened slightly while the manufacturing component strengthened, albeit from 46.6 in January to 47.3 in February. New orders continued to fall, and companies again lowered their staffing levels amid muted demand. Economic output in the eurozone remains stagnant. The somewhat mild recession in the manufacturing sector is being masked by the slow and sluggish expansion in the services sector. Political uncertainty in Germany and France further complicates the outlook.
The European Central Bank (ECB) cut rates by another 25 basis points on March 6, bringing the key lending rate to 2.5%. While the latest inflation reading came in at 2.4%, the ECB slashed its economic forecasts for the region. The eurozone economy is projected to grow just 0.9% in 2025 and 1.2% in 2026 and inflation should average 2.3% in 2025 and 1.9% in 2026. The downward revisions reflect trade uncertainty and lower exports. Monetary policy has become meaningfully less restrictive.
Japan’s GDP Falls in 2024, Bond Yields Surge Higher
Japan’s Q4 GDP beat expectations with an increase of 0.7% quarter-over-quarter (Q/Q). Full-year GDP growth slowed to 0.1%, a sharp decline from the 1.9% growth seen in 2023. A jump in exports helped boost GDP, while domestic demand was a drag on growth. This comes as the BOJ raised rates to their highest level since 2008 at 0.5%. Weak domestic demand remains a major concern. Higher inflation and the selloff in global bonds sent the 10-year JGB yield to its highest level since 2009 at 1.5%.
Source: Cabinent Office Japan
Is China’s Economy Finally Finding its Footing?
China’s factory activity expanded at its fastest pace in three months to 50.8 in February based on the Caixin/S&P Manufacturing PMI. This was an increase from 50.3 in January and highlighted the return to work after the Lunar New Year holiday. New export orders rose at the fastest pace since April 2024, perhaps due to U.S. importers front-running tariffs in anticipation of even higher levies in the near future. The official manufacturing PMI rose to 50.2 in February from 49.1 in January, according to the National Bureau of Statistics. The non-manufacturing PMI, which includes services and construction, also climbed to 50.4 from 50.2 in January. The non-manufacturing subindices suggest things may be a little less rosy than what headline numbers suggest. Most of the sub-indices, including new orders and new export orders, contracted.
India GDP Beats Expectations; Growth in Brazil Forecast to Decelerate in 2025
India’s economy picked up in the most recent quarter as manufacturing and government spending regained momentum. The world’s fifth-largest economy grew 6.2% Y/Y in Q4, ahead of the 5.6% growth rate reported in Q3. The Indian economy benefited from strength in manufacturing and private consumption. Brazil’s economy grew 3.5% in 2024, but the government just cut its 2025 growth forecast to 2.3% from 2.5%. Brazil has been fighting rising inflation, which has led to higher interest rates and tighter monetary policy.
What Are the Potential Impacts from Tariffs?
Tariff headlines continue to escalate, unnerving markets with worries that trade tensions could have a more significant impact on U.S. GDP growth and inflation. Thus far, President Trump has put tariffs on Mexico, Canada, and China, but some products (most notably cars) were exempted from initial tariffs due to the potential impact on consumers and prices. Additional tariffs have been threatened on the EU, China, steel and aluminum, and reciprocal tariffs remain a risk. While tariffs immediately impact prices, the impact to GDP often occurs as a result of the uncertainty and reigning in of spending from businesses and consumers.
The risk of recession is low today (but rising) but could increase if countries retaliate and tariffs escalate further. Any delay in the extension of tax cuts could also hurt from the standpoint of fiscal stimulus. The Fed has been on hold for the last few months due to inflation being stickier than anticipated, but they may be forced to intervene depending on market conditions. Negatives to consider are higher inflation, a decline in GDP growth, and higher unemployment. Positives could be fairer trade policy, decreased trade deficits, and potential for increased rate cuts by the Fed.
Source: Investment Institute, Macrobond
U.S. Profitability is King!
U.S. equities have suffered losses thus far in 2025, and are underperforming non-U.S. equities, albeit over a short time period. Through 3/6/25, the S&P 500 has fallen 2.2% versus the MSCI EAFE return of 11.2%. A weaker dollar has caused about 4.5 percentage points of this non-U.S. outperformance. Our thesis has not changed in that U.S. GDP and corporate earnings growth remains stronger than EAFE markets, and profitability is also consistently higher.
Source: Haver Analytics, Bloomberg, Apollo Chief Economist
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