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Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

Robert Brusca

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Neither the service sector nor the manufacturing survey value is particularly strong. The services climate headline has a 25-percentile standing; it has been higher about 75% of the time. That is not a good result. For manufacturing and industry, the standing is just short of the 50% mark which leaves it quite close to its historic median. That is not strong, but it is not weak either; it’s a modest middle ground. But February’s reading gave up ground, falling to 102.1 from 105.4 in January, back essentially to its December 2025 level. Even so, the February value has not been exceeded persistently until we go back to August 2022—three and one-half years ago.

The rebound in manufacturing is nascent; we can question its sustainability. And it is also only a modest step up after February’s erosion. Orders and demand flared higher in January and backed down in February. Orders and demand have a 50-percentile standing, with foreign orders much stronger at a 75-percentile standing. While production has a sub-median, 42-percentile standing, responses, when aggregated, show an ‘own-personal’ response standing at 62.2%. Maybe there is more granular, industry-level confidence that is being restrained by macroeconomic pessimism. This two-tier response is recreated compatibly for prices where firms see high own price trends stronger than their whole-economy trend. The own-price trends are elevated with a ranking over their 60th percentile while the macro price expectation is at a 48-percentiel standing. Production expectations are a classical representation of this month’s survey, falling back this month after some improvement last month and sporting a 49.1 percentile standing – a near median result. The manufacturing survey does not suggest any trouble; it exhibits near normal behavior, with orders at a midstream level/ranking.

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The services survey also backs off in February, but its ranking is weak, at the 25-percentile level. The 3-month and 12-month averages, when ranked, are ‘similarly’ weak—a clear sign that this services weakness is a real phenomenon. Only one-entry among the ten in the table has a ranked percentile standing over the 50-percent mark—that is the sales-price expected over the next three months. And that is not particularly reassuring. Employment trends, as observed and expected, rank in their 6th to 12th percentiles. Observed and expected sales trends are very low-ranking, and they weaken in February. The formal outlook is a lower one-third phenomenon, and it has been weakening.

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France’s trends play out on the chart. There are issues revealed here that are only made clear by looking at the chart and the ranking, and tying-in those trends with what was reported this month. The broadest view of the manufacturing & services sectors is upsetting. The medium-term view is more constructive, but only because of the industrial rebound. Yet, looked at up close, that rebound is too nascent to trust. The short term remains expensive for industry, but unreliably so. The French economy has been struggling for a while, and France has severe budget problems that are also creating political issues. French policy is under pressure, and remember that, as an EMU member, there is no central bank to dedicate policy to resolving its issues. EMU-wide inflation is more or less under control, but rate cutting stimulus is unlikely.

France

French Manufacturing and Services Surveys: Two Sectors, Two Different Trends, and Lingering Weakness

Winnie Tapasanun

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Total factory orders unexpectedly fell 0.7% m/m in December after a 2.7% gain in November and a 1.2% drop in October, according to data from the U.S. Census Bureau. December marked the second m/m fall in three months following m/m increases in September and August. The Action Economics Forecast Survey had expected a 0.8% m/m December increase. The year-on-year growth rate slowed to 4.3% in December from 5.4% in November (-1.8% in December 2024), remaining far below a peak of 39.6% in April 2021. Notably, orders for nondefense aircraft & parts plunged 24.8% m/m in December after a 98.2% surge in November and a 17.9% drop in October. Factory orders excluding defense fell 1.2% (+3.8% y/y) following a 3.2% November rebound. Factory orders excluding the transportation sector rose 0.4% (1.2% y/y), the third m/m rise in four months, after a 0.1% November uptick. For all of 2025, factory orders gained 4.0% after a 0.5% decline in 2024 and a 0.3% increase in 2023.

Durable goods orders fell 1.4% (+10.1% y/y) in December after a 5.4% rebound in November (matching -1.4% m/m in the advance report on February 18). The December m/m fall was led by a 5.4% orders drop (+20.2% y/y) in transportation equipment following a 15.2% November jump. Other major durable goods orders categories rose m/m, led by a 3.1% gain (7.4% y/y) in computers & electronic products, followed by increases of 2.1% (9.1% y/y) in primary metals, 0.9% (3.5% y/y) in fabricated metal products, 0.5% (10.0% y/y) in machinery, 0.3% (4.0% y/y) in electrical equipment, appliances & components, and 0.1% (4.5% y/y) in furniture & related products.

Nondurable goods orders, which equal nondurable goods shipments, were essentially unchanged (-1.4% y/y) in December after a 0.1% dip in November (the fourth successive m/m decline). The flat December reading reflected m/m increases of 2.1% (-0.7% y/y) in textile products, 1.9% (0.3% y/y) in apparel, 0.6% (3.4% y/y) in beverage & tobacco products, 0.6% (4.3% y/y) in chemical products, 0.3% (-0.1% y/y) in paper products, and 0.2% (-0.3% y/y) in food products. To the downside, the following nondurable goods shipments declined m/m in December: petroleum & coal products (-1.3%; -13.4% y/y), textile mills (-1.0%; -1.4% y/y), leather & allied products (-0.5%; -7.8% y/y), and printing (-0.4%; -1.2% y/y). Meanwhile, shipments for plastics & rubber products were virtually unchanged (+0.5% y/y) after a 0.4% November rebound.

Total shipments rose 0.5% (2.2% y/y) in December, the second m/m rise in three months, following a 0.2% decline in November. Excluding transportation, shipments increased 0.4% (1.0% y/y), the third m/m gain in four months, after a 0.1% November uptick. Shipments of durable goods industries recovered 1.0% (5.8% y/y), also up for the third time in four months, after a 0.3% November decline. This reflected m/m durable goods shipments gains of 2.5% (7.2% y/y) in primary metals, 1.4% (8.8% y/y) in transportation equipment, 1.3% (8.1% y/y) in machinery, 0.7% (4.6% y/y) in fabricated metal products, 0.6% (5.1% y/y) in computers & electronic products, and 0.5% (1.2% y/y) in nonmetallic mineral products. Durable goods shipments for furniture & related products (-0.3%; +4.0% y/y) and wood products (-0.3%; -3.9% y/y) fell m/m in December, while durable goods shipments for electrical equipment, appliances & components (+2.4% y/y) and miscellaneous durable goods (+2.3% y/y) were flat m/m.

Unfilled orders rose 0.9% (10.3% y/y) in December on top of a 1.4% advance in November, registering the fifth consecutive m/m rise and the seventh in eight months. Excluding transportation, unfilled orders grew 0.4% (1.6% y/y), the strongest of five straight m/m increases, after a 0.3% November rise. Backlogs of durable goods rose 0.9% (10.3% y/y) in December, led by m/m gains of 1.2% (16.1% y/y) in transportation equipment and 1.0% (3.7% y/y) in electrical equipment, appliances & components, partially offset by a 0.1% decline (+2.2% y/y) in primary metals.

Inventories edged up 0.1% (0.9% y/y) in December after a 0.2% rise in November and no change in October. Excluding transportation, inventories inched up 0.1% (1.2% y/y), the seventh m/m increase in eight months, after a 0.1% November uptick. Durable goods inventories grew 0.3% (1.5% y/y), the third successive m/m gain, after a 0.2% November rise, while nondurable goods inventories fell 0.2% (-0.1% y/y), the third m/m fall in four months, after a 0.1% November increase.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- December factory orders -0.7% m/m (+4.3% y/y); still 7.2% above the Jan. ’24 low.
- Durable goods -1.4% m/m; nondurable goods orders flat; shipments +0.5% m/m.
- Transportation orders -5.4% m/m, led by a 24.8% plunge in nondefense aircraft orders.
- Unfilled orders +0.9%, the fifth straight m/m rise.
- Inventories +0.1%, the second consecutive m/m increase.

U.S. Factory Orders Fall in December on Weak Nondefense Aircraft Orders

Michael J. Moran

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The National Activity Index published by the Federal Reserve Bank of Chicago totaled 0.18 in January, a jump of .39 index points from the reading in December. The latest tally was favorable. Not only did the measure post a sharp month-to-month change, but it also signaled that the economy is growing faster than its long-run trend rate. 

(The index is constructed to equal zero when the economy is growing at its long-run trend rate. Thus, positive readings suggest brisk growth. Negative readings should not necessarily be viewed as disappointing. Researchers at the Chicago Fed note that the index needs to ease to -0.7 before recession becomes a risk. The measure would be deeper in negative territory if the economy was contracting.)

Although January brought encouraging news, an element of caution is warranted. The index often moves erratically, and thus a single monthly change could be dominated by random volatility. A three-month moving average squeezes out most of the volatility, leaving a more reliable perspective on the economy. Here, too, the news in January was favorable, as the 3-month average rose .23 index points to -.06, just a shade below a signal of trend growth and the best reading since April of last year. The eight months between April 2025 and January showed an average index value of -.24, with observations ranging from -.13 to -.38.

The National Activity Index is a composite of 85 economic indicators, grouped into four major categories: production and income; employment, unemployment, and hours worked; personal consumption and housing; sales, orders, and inventories. All four components improved month-to-month, with the production and income component providing most of the lift (up .22 index points to .19). Three of the four components were above zero in January, with only the sales, orders, and inventory in negative territory (and barely so at -0.02).

These figures are available in Haver's **SURVEYS** database.

- January results showed noticeable improvement from prior months.
- All four components contribute positively.

Chicago Fed National Activity Index: Suggesting Trend-Like Growth

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Germany's IFO index shows improvement in February compared to January. The climate index improves, the current conditions index improves, and expectations improve. All three all-sector headlines improve in February compared to January. However, all three metrics continue to register net negative readings, indicating that the sectors are showing more contraction than expansion, but less contraction than it had been the case previously. We ranked these headlines on data back to 1993; the climate index has a 22.5 percentile standing, expectations have a 22.4 standing, and current conditions have a 16.9 percentile standing. All three of the headline metrics have standings in the lower quartile of their queue of values back to the early 1990s. This is clearly not a stellar report but a report from an economy that is struggling. Even though it's widely reported that the climate index is currently on a six-month high; it may be on a six-month high, but it's not really much different than it was six months ago and only up by 1.1% from its lowest mark in the intervening five months—so not impressive. This is a grueling, crawling, dig-out from difficult circumstances. The COVID pandemic was a sucker punch to the global economy, and it was followed by the Russian invasion of Ukraine that hit Europe especially hard because of the proximity.

Since then, other geopolitical tensions have risen. Europe's relationship with the United States has deteriorated, in part because Europe—Germany in particular—was reluctant to detach itself from its mercantile relationships with Russia and was also reluctant to increase its financial participation in NATO. The U.S. was carrying the burden of the protective umbrella for Europe at a time when Europe didn't really think it needed a protective umbrella and so it was unwilling to pay for anything more substantial. When the rainy day came and when the Russian invasion of Ukraine occurred, Europe was completely unprepared and the U.S. was its protector. While Germany and other European countries quickly made it clear that they were fully on board with NATO defense, the U.S. was much less enthusiastic about carrying the burden after Europe had put its financial probity ahead of its defense spending obligations. Now Europe does not see the U.S. and its perceived greater needs for security because of improved navigation from the Arctic Circle to the North Atlantic.

These troubles continue to dog the relationship between the United States and Europe, and the European Community. And Europe’s own economic struggles continue. In the climate readings, all four of five sectors improve from January to February. Current conditions improve in three of the five sectors, with retailing and wholesaling slipping month-to-month. Expectations do improve overall, but three of five sectors take a step back in February, with expectations improving sharply for services, and substantively for wholesaling. Still manufacturing, construction, and retailing expectations stepped back.

Across the three broad areas of assessment across five sectors in each, there are only two (two of fifteen) sector metrics that rank above their 50th percentile (above their respective medians) when ranked against readings back to 1993. Both of those elevated rankings are for construction, one for Climate, and the other for current conditions, but construction expectations, at a 44.5 percentile standing, are not far below their median.

Still, the lowest environmental standings are for services, except under expectations where the services reading is second-weakest to retailing. The graphic shows some tendency for an upturn in climate and current conditions, but they are countered by an expectations path that has topped out and has been gradually leaning lower—and doing that with a current ranking in only its 22.5 percentile. So, while there is some life in the IFO survey this month, we are still looking at a patient in intensive care, not one ready to join Olympic competition—at least not yet.

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Germany

German IFO: Business Confidence Claws Its Way Out of a Hole

Tian Yong Woon

In our Letter this week, we delve deeper into AI, with a focus on Asia and, where relevant, comparisons with the US. The global economy remains firmly in the buildout phase of AI, where much of the near-term economic benefit is derived from investment in hardware and enabling infrastructure—such as AI chips, memory, and data centres. At the same time, though still at a relatively early stage, firms are beginning to adopt advanced AI capabilities and integrate them into workflows in pursuit of productivity gains. So far, labour productivity improvements have been evident in parts of Asia (chart 1), largely driven by stronger exports (chart 2) and capital deepening—similar to trends observed in the US (chart 3) and, within Asia, in economies such as Malaysia (chart 4). However, these gains have yet to translate into a clear and sustained acceleration in total factor productivity (TFP), which accounts for the combined use of labour, capital, and other inputs—though TFP is admittedly a challenging metric to estimate, as illustrated by the US case (chart 5). This raises an important question: what happens when the AI buildout phase begins to moderate, and the associated investment-led tailwinds fade? At that point, further AI-related gains will depend more heavily on the successful embedding and diffusion of AI across sectors. On this front, Asian economies remain at very different stages of readiness to adopt AI (chart 6), suggesting that the next phase of productivity gains may be uneven across the region.

**The productivity story**
Several Asian economies have already recorded substantial productivity gains in recent years, even before the narrative around AI-driven productivity boosts gained traction last year. As shown in chart 1, measured by labour productivity—simply defined as output per employed person—economies such as Taiwan and several in Southeast Asia stand out for their strong performance. However, these gains cannot be attributed solely to the promise of AI. By definition, labour productivity rises whenever output (the numerator) grows faster than employment (the denominator). Such an outcome can stem from a range of factors—cyclical recoveries, capital deepening, sectoral shifts, or efficiency improvements—and does not necessarily reflect widespread AI adoption.

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Digging deeper, however, it would be equally misleading to suggest that Asian economies have not benefited from AI-related productivity gains. As shown in chart 2, exports have been a key driver of growth across several economies in recent years. In particular, Taiwan and South Korea—both major producers of AI-related hardware—have benefited from strong global demand for advanced chips and memory used in AI infrastructure. Taiwan stands out: its Q4 real GDP growth surged to 12.7% y/y, with net exports accounting for nearly all of that expansion. Notably, integrated circuits—often comprising around a third of total exports—have played a central role in this performance. Thus, while many Asian economies may not yet be at the forefront of deploying cutting-edge AI models domestically, they are significant beneficiaries of the current AI infrastructure buildout. By supplying the semiconductors and components underpinning this expansion, parts of the region are already capturing meaningful gains from the AI cycle.

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**Capital deepening**
Another key channel through which labour productivity can be achieved—aside from reducing the denominator (employment)—is capital deepening, or an increase in capital per worker. On this front, some advanced economies, including the US, have already moved in this direction as firms ramp up investment in AI-related infrastructure and equipment. In recent years, growth in investment in information processing equipment and data centres has outpaced other demand components, such as consumption and exports, reflecting in part the ongoing AI-related buildout (chart 3).

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The growth-enhancing—and by extension productivity-supporting—effects of such AI-related capital deepening are also evident in parts of Asia. In Malaysia, for example, the rapid expansion of its data centre industry has spurred strong gains in investment and construction activity, alongside spillovers to related sectors (chart 4). Importantly, these AI-related, investment-led gains are not limited to data centre development. Capital outlays to expand production capacity for AI-related goods—such as semiconductor fabrication and advanced chip manufacturing—operate through the same channel, increasing the capital stock and, over time, lifting output per worker.

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**Beyond the AI buildout**
So far, the discussion has centred on productivity in terms of labour productivity—output per employed person. That metric can be lifted relatively easily by increasing the numerator, whether through stronger exports or higher investment, as outlined in the previous sections. But what about gains in total factor productivity (TFP), rather than just labour productivity? TFP takes into account inputs beyond labour, including capital and other factors. An increase in TFP therefore implies higher output generated from the same combination of labour, capital, and other inputs. It is arguably this type of efficiency gain that investors hope will materialise from the adoption of AI. That said, TFP is notoriously difficult to measure. In the US, for instance (see chart 5), estimates of TFP growth can vary depending on the data source and methodology used. Even so, higher-frequency measures of US TFP have yet to show an outsized acceleration, suggesting that AI-related optimism has not—at least for now—translated into a discernible surge in measured productivity.

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Another key dimension to monitor is how prepared Asian economies are to embrace AI and embed it effectively in order to capture its anticipated productivity gains. While many economies in the region are currently benefiting from labour productivity gains—driven by stronger manufacturing activity and exports of AI-related goods and infrastructure—such gains may eventually moderate, particularly once the initial buildout phase peaks. At that stage, the more durable benefits will need to come from a different channel: the total factor productivity gains associated with the actual adoption and diffusion of AI across industries. On this front, Asian economies differ markedly in their readiness. As shown in chart 6, an IMF index—incorporating factors such as digital infrastructure, innovation capacity, human capital, and regulatory frameworks—highlights this divergence. More advanced economies, including Singapore, South Korea, and Japan, rank highly, while others such as Vietnam, India, and the Philippines lag behind. That said, the concerted efforts by several developing Asian governments in recent years to strengthen digital infrastructure, upgrade skills, and refine regulatory frameworks suggest that this gap could narrow over time.

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Asia

Economic Letter from Asia: Asia and AI

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Real Gross Domestic Product rose 1.4% in the fourth quarter of 2025, slower than the recent average but no doubt influenced by the government shutdown. Federal spending often moves erratically, but the tumble of 16.6% in the final months of last year was unusually large. Indeed, one has to go back to 1972 to find a sharper decline (and to the 1950s before that), and these results were only slightly weaker than the Q4 decline.

Even allowing for the government shutdown, the latest results were a bit shy of expectations. Without the drop in federal outlays, which subtracted 1.2 percentage points from GDP growth, the economy would have expanded 2.6% in Q4, still shy of most surveys that showed consensus forecasts in the neighborhood of 3.0%. A downside surprise of sorts occurred in net exports. Monthly figures through November had suggested that international trade would provide strong support, but this sector added only 0.1 percentage point to GDP growth.

Other areas posted nondescript results. Consumer spending and business fixed investment were less vigorous than the best results of the past two years, but the latest growth rates were comfortably within recent ranges. Housing activity remained soft, making the sixth negative contribution to GDP growth in the past seven quarters. However, the constraints from housing over this span have generally been small.

The fourth quarter, and most of last year, were oddities because of the government shutdown in Q4 and the imposition of tariffs in April followed by marked adjustments in subsequent months. Such changes can lead to pronounced swings in economic activity and leave a muddled picture on underlying trends. In such environments, a different perspective on economic output can be helpful. Specifically, private domestic final demand (PDFD, GDP less government spending, net exports, and inventory investment) excludes areas that often move erratically, thus removing random shifts and reducing volatility.

PDFD was especially useful last year because tariffs generated pronounced shifts in net exports and inventory investment, and the government shutdown distorted activity in the fourth quarter. As shown in the chart below (left), quarterly variations in private domestic final demand were modest last year. The underlying trend decelerated, but the slowing was modest and growth in the fourth quarter was respectable at 2.4%.

The GDP price index rose at an annual rate of 3.6% in the fourth quarter of the year, one of the heftier advances of the past three years. A surge of 15.6 percent in the prices paid by the federal government had a strong influence on this result (shutdown related?), but readings of 3.9% for business equipment and 2.9% for consumer goods and services also were suggestive of an inflation impulse in the economy.

The increase in consumer prices was evident in the December report on personal income and consumption, which showed month-to-month increases of 0.4% for both headline and core price indexes for personal consumption expenditures. Year-over-year readings inched higher to 2.9% for all items and 3.0% for prices excluding food and energy. The latest results will no doubt leave Fed officials uncomfortable.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Non-federal activity was lighter than expected, but still respectable.
- PCE inflation remains stubborn.

Q4 GDP: Constrained by Federal Spending

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New single-family home sales fell 1.7% m/m (+3.8% y/y) to a seasonally adjusted annual rate of 745,000 units in December—above expectations—following a 15.5% jump to 758,000 in November and a downwardly revised 8.8% drop to 656,000 in October (previously -0.1%, 737,000), data from the U.S. Census Bureau showed. The Action Economics Forecast Survey had expected sales of 733,000 for December. The December figure was the second m/m decline in three months, though sales remained 43.5% above the July 2022 low of 519,000. For all of 2025, new home sales declined 0.5% after gains of 3.0% in 2024 and 4.4% in 2023. The December m/m sales fall occurred alongside a decrease in the average 30-year fixed mortgage rate to 6.20%, the lowest since September 2024, down from 6.24% in November and 6.72% in December 2024; the rate had subsequently continued trending downward, according to Freddie Mac.

By region, December new home sales delivered a mixed performance. Sales in the Northeast plunged 37.3% (+12.1% y/y) to 37,000 in December following a 37.2% gain in November, registering the lowest level since September and the steepest m/m decline since February 2023. Sales in the South fell 6.7% (-1.1% y/y) to 430,000, the first m/m fall in three months, after a 10.0% November gain. To the upside, sales in the Midwest jumped 31.7% (30.1% y/y) to 108,000 after a 2.4% November decline, marking the largest m/m gain since January 2024 and the highest level since December 2020. Sales in the West, up for the fourth time in five months, rose 9.0% (1.8% y/y) to a three-month-high 170,000 on top of a 41.8% November surge. Notably, the South remained the dominant region, accounting for 57.7% of total U.S. new home sales.

The median sales price of a new home rose 4.2% (-2.0% y/y) to a three-month-high $414,400 in December, the first m/m rise in four months, following a 1.4% decline to $397,600 in November (the lowest since July 2025). The median sales price was 10.0% below its record high of $460,300 in October 2022. The average sales price of a new home, up for the third straight month, rose 0.5% (4.7% y/y) to $532,600, the highest since July 2022, after a 1.7% November increase to $530,200. The average price was 1.6% below a high of $541,200 in July 2022. These sales price data are not seasonally adjusted.

The number of unsold new homes on the market fell 2.7% (-3.5% y/y) to 472,000 in December after a 1.0% decline to 485,000 in November, representing the sixth m/m fall in seven months and the lowest level since August 2024. The latest figure was 10.8% above a low of 426,000 in July 2023. The seasonally adjusted months' supply of new homes for sale dipped to 7.6 months in December—the lowest reading since July 2023—after falling to 7.7 months in November. The latest reading, while above a low of 6.9 months in May 2023, remained below a high of 10.6 months in July 2022.

The median number of months a new home stayed on the market rose to 3.0 months in December, the highest since April 2022, after rising to 2.9 months in November. The latest number was above its record low of 1.5 months in September and October 2022 but well below a peak of 5.1 months in March 2021. These figures date back to January 1975.

New home sales are recorded when the sales contract is signed. New home sales activity and prices are available in Haver's **USECON** database. The consensus expectation figure from Action Economics is available in the **AS1REPNA** database.

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- December sales -1.7% m/m (+3.8% y/y) to 745,000; still 43.5% above the July ’22 low.
- Sales m/m down the Northeast (-37.3%) and South (-6.7%), but up in the Midwest (+31.7%) and West (+9.0%).
- Median sales price up to a three-month-high $414,400; avg. price up to $532,600, highest since July ’22.
- Months' supply eases to 7.6 mths., lowest since July ’23.

U.S. New Home Sales Decline in December After November’s Jump

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PMI data for February, issued by S&P on a flash basis, show relatively broad improvement PMI performance in February, with the exception of Australia, India, and the United States. The European Monetary Union shows improvement in its composite index as well as for manufacturing and services. This pushed to higher ratings, supported by Germany and France with the exception that French manufacturing took a step back in February. In the United Kingdom, the composite and manufacturing indexes moved ahead but services weakened. In Japan, the composite, manufacturing and services all improved on a month-to-month basis. However, Australia saw a step back in all three sectors after several months of continued strengthening. India also saw a step back in the composite and services after a recent string of improvements being reported. The United States shows uneven conditions, with a weakening across the board month-to-month in February vs. an across-the-board rebound in January, and then across-the-board weakening in December. This leaves the U.S. in a weakening and volatile situation

An unweighted average of the monthly composite, manufacturing, and services indexes shows a one-tick step back for the composite, a small step up for manufacturing, and a small step back in services for February compared to January.  January had made across the board improvements relative to December.

Sequential comparisons where data are lagged by one month and the calculations are made only off of hard data (not off of flash or preliminary data) show mixed economic conditions and unclear trends. EMU shows sequential strengthening in the composite as do France and Japan; Japan also shows persistent strengthening in manufacturing, as the yen has been dropping. And while there is a lot of weakening sequentially, there is no persistent weakening reported for 12-months to 6-months to 3-months.

Over three months, there's a split in what is reported with 12 of the 24 sectors weakening compared to six months ago and 12 of them strengthening. Over six months, only six of the sectors are weakening; the remainder strengthening over 12 months; eight of the sectors are weakening over 12 months compared to a year ago, with the remainder strengthening. While it's not a clear path to deterioration, there is a clear tendency to deterioration over three months compared to six months. However, an unweighted comparison of the three sectors shows that composite manufacturing and services still demonstrate a bit of muddy water with the composites weakening over three months only by a tick to 52.9 compared to 53 while manufacturing improves slightly and services weakens slightly compared to six months. Over six months, there's only a slight step back from the statistics reported over 12 months.

**Not a lot of shifting, but some good news and bad news**
The bottom line is there's not a whole lot of change going on according to the PMI data. On a breadth basis, there has been some improvement, but the magnitudes involved seem to wash out some of that improvement, neutralizing when expressing as average comparisons. However, one place where there does appear to be evidence of more solid performance is in the queue percentile standings. Among these 8 reporters involving 24 sectors, only four sectors report current standings below their median on data back to January 2022. One of those countries is India, with a weaker composite and services sector; the other is the United States, with a weaker composite and services sector. The U.S. composite has a queue percentile standing at its 42nd percentile, below its neutral position of 50%. The U.S. services sector is even weaker with a 36-percentile standing, close to the lower third of all the U.S. PMI values that have shown for services since 2022 on a monthly basis.

U.S. economy has been cranking out some reasonably strong economic numbers across the board including consumer spending and GDP figures, allowing for a disappointing fourth quarter that is being attributed to the government shutdown. However, what's been lacking on the U.S. side has been strong job market performance and, of course, because of mortgage rates being high, there has been a weak construction sector in the U.S. economy. Still, the queue standing across the board for other countries should be reassuring. The average composite ranking for this group of countries is in the 70th percentile, with manufacturing in the 75th percentile and services in their 61st percentile. These are relatively firm readings and should be reassuring. At the same time, central banks have made progress on inflation and tightening cycles have not been engaged or easing cycles are being extended for all central banks except for the Bank of Japan, which has been experiencing growth and inflation in different measures from the rest of the G7 countries. On balance, however, global growth appears to be moving forward and now we'll have to see what happens with the U.S. Supreme Court having overthrown the imposition of tariffs that the Trump administration put in place without Congressional backing. We could see some considerable shifting in the months ahead.

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S&P PMIs Are Mostly Stronger in February

Andrew Cates

**The Global Business Cycle**
The latest flash composite PMI readings reinforce the theme of a still-expanding but increasingly uneven global cycle. As the chart shows, activity remained in expansion territory across most major economies in February, with the UK, Japan and Germany all posting solid readings and positive three-month momentum. The United States, by contrast, is positioned to the left of the vertical axis, signalling a modest loss of recent momentum even though the level of activity remains comfortably above the 50 threshold. At the top end, India continues to stand out with both strong levels and firm recent gains, underlining the resilience of its domestic demand cycle. Meanwhile, France sits close to the stagnation line, highlighting ongoing softness within parts of the euro area. For markets, the key takeaway is that global growth has not rolled over — but leadership is broadening and becoming more differentiated across regions.

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**South Korea’s Semiconductor Trade**
One factor helping to sustain global activity may well be the ongoing AI investment cycle, and Korea’s semiconductor exports provide a timely illustration. As the chart shows, shipments in the first 20 days of February have surged to fresh highs, extending the powerful upswing seen over the past year. Given Korea’s central role in the global memory and advanced chip supply chain, this strength is unlikely to be purely cyclical. Instead, it is consistent with continued heavy demand linked to data centres, high-performance computing and broader AI infrastructure build-out. In that sense, while parts of the global economy show signs of cooling, the AI capex cycle appears to be providing an important offset — reinforcing trade flows and helping to keep overall activity on a firmer footing than might otherwise have been expected.

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**US Investment in Data Centres**
The surge in Korea’s semiconductor exports is echoed in the composition of US investment, where AI-related capital spending continues to accelerate. As the chart shows, real private fixed investment in data centres has risen sharply since 2022, significantly outpacing both information processing equipment and overall non-residential business investment. This divergence points to an ongoing, capital-intensive build-out of digital and cloud infrastructure, consistent with strong global demand for computing power. For markets, the key takeaway is that the AI investment cycle remains firmly in expansion mode, helping to underpin activity in both the US and the broader technology supply chain.

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**Germany’s Capex Cycle**
If the US investment story is being powered by AI infrastructure, the latest data suggest Germany may finally be seeing a cyclical turn of its own. As the chart shows, domestic capital goods orders have picked up noticeably in recent months after an extended period of weakness. While the series remains volatile, the recent spikes hint at a tentative revival in investment demand within Europe’s largest manufacturing economy. Part of this improvement may reflect the early effects of easier financial conditions, but there are also signs that increased defence spending and related industrial orders could be beginning to filter through the pipeline. More broadly, the contrast with the US is instructive: whereas America’s capex surge is heavily concentrated in digital and AI infrastructure, Germany’s rebound appears more traditional and policy-driven, potentially marking the early stages of a broader European investment stabilisation.

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**Oil Prices, Policy and Financial Markets**
Shifting focus from investment to markets, the close co-movement between oil prices and short-term Treasury yields remains striking. As the chart highlights, the correlation between WTI and the US 2-year yield has stayed unusually tight, underscoring how energy markets continue to feed directly into macro and policy expectations. Recent weeks have also seen a modest firming in crude, in part reflecting renewed geopolitical tensions involving Iran and the associated risk premium around Middle East supply routes. Oil has hovered near multi-month highs amid rising military and diplomatic strains between Washington and Tehran, even though physical supply has not yet been disrupted. For investors, the key point is that energy-driven inflation risks have not fully faded, meaning oil price volatility could still complicate the timing and extent of policy easing globally.

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**Japan’s 10-year JGB yields and data surprises**
Finally, developments in Japan’s bond market are also worth watching from a global perspective. The chart shows a clear relationship between the three-month change in 10-year JGB yields and the Citi Japan surprise indices, with yields tending to track shifts in the growth and inflation data flow. In recent weeks, the downward drift in JGB yields has been particularly notable. The move appears consistent with a run of softer-than-expected growth and inflation readings, which have tempered near-term tightening expectations. Given Japan’s outsized role in global capital markets and carry dynamics, even modest moves in JGB yields can have broader spillovers. To that extent, the recent pullback may have provided a mild anchoring influence on global bond markets at the margin, even as the broader normalization narrative remains intact.

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Over the past few days, financial markets have been navigating a fresh wave of policy and geopolitical cross-currents, with the US Supreme Court ruling on executive tariff authority adding a new layer of uncertainty to the trade outlook. At the same time, the AI investment boom continues to provide an important cyclical tailwind, even as investors remain alert to valuation risks, while renewed tensions involving Iran have reintroduced an energy risk premium. Against that backdrop, this week’s charts paint a picture of a global economy that is still expanding but becoming more differentiated. Latest flash PMI surveys confirm that global activity remains in growth territory despite some cooling in the US (chart 1). Strong semiconductor exports from Korea (chart 2) and surging US data-centre investment (chart 3) both underscore the continued force of the AI capex cycle, while a strong pickup in German capital goods orders (chart 4) hints at a more traditional, policy-linked investment impulse emerging in Europe. Meanwhile, the tight co-movement between oil prices and US front-end yields highlights (chart 5) the ongoing macro sensitivity to energy markets, and the recent downward drift in Japanese government bond yields — alongside softer data surprises — suggests that global bond markets may be receiving at least a modest anchoring impulse from Japan (chart 6).

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Charts of the Week: The AI Undercurrent

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