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Posted March 2, 2026 at 9:45 am
The U.S. economy grew by a weaker than expected 1.4% saar in 4Q25. A very sharp 17% annualized decline in federal government spending was the main culprit for the weak report as real GDP, excluding the federal government, rose by 2.7% annualized. Consumers continued to power the economy forward, with spending rising a solid 2.4%. Spending on equipment and intellectual property also showed strong gains, while spending on both commercial construction and home building fell. Fiscal stimulus should lead to stronger growth in the first half of 2026.
The January jobs report came in above consensus expectations, with nonfarm payrolls rising by 130k. However, mild weather during the survey week may have modestly biased this print higher, with only 291k workers reporting working part-time due to bad weather, the fewest in any January since 1986. Elsewhere, the annual benchmark revision removed 862k jobs from March 2025 payrolls on a non-seasonally adjusted basis. Total private wages rose 0.4% m/m and 3.7% y/y, although December wage growth was revised down to 0.1% m/m. The unemployment rate fell by 10bps to 4.3%. Moving forward, updated population growth estimates suggest sluggish labor force growth should keep the unemployment rate from moving much higher. As fiscal stimulus kicks in and boosts consumer spending, hiring could also pick up, limiting the need for early Fed easing.
NEW THIS WEEK
The 4Q25 earnings season is coming to a close. With 95% of market cap reporting, consensus is currently estimating EPS will grow by 12.8% y/y. Looking at the three main sources of EPS growth, sales, margins and shares are expected to contribute 8.0, 5.6 and -0.9 percentage points, respectively. From a sector perspective, tech is doing the heavy lifting this quarter, on track to drive 59% of the y/y EPS growth. Financials and industrials are also seeing strong earnings growth of 27.8% and 7.7%, respectively, but the consumer and health care sectors are struggling as rising costs hurt profitability.
NEW THIS WEEK
The January CPI report looked encouraging at first glance. Headline and core inflation rose 2.4% y/y and 2.5% y/y, respectively. Both eased relative to December, and headline inflation surprised to the downside due to a sharp decline in gasoline prices. The details of core inflation, however, were less reassuring. Core goods prices were flat for a second month, mainly due to a sharp drop in used auto prices. Excluding autos, core goods rose 0.4% m/m. Core services inflation rose 0.4% m/m, but excluding rent and owners’ equivalent rent, which are being held down by shutdown-related adjustments, prices climbed 0.6% m/m. Looking forward, companies may use fiscal stimulus as an opportunity to pass on tariff costs they have been absorbing, and inflation could accelerate through the middle of this year.
At its first meeting of 2026, the Federal Reserve voted to leave the federal funds rate unchanged at a target range of 3.50%–3.75%, although Governors Miran and Waller voted in favor of a 25bp cut. New statement language leaned hawkish, with economic activity described as “solid” and the unemployment rate “showing signs of stabilization.” During the press conference, Powell noted that the most likely next move remains a cut, but only after it becomes clear the inflationary effects of tariffs will be temporary. The Fed is well positioned to remain on hold through 1H26 at least, and will likely maintain its current policy stance until the balance of risks, as evidenced by incoming data, decisively favors action on one side of its dual mandate.
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