Markets spent much of this week digesting the geopolitical escalation in the Middle East while simultaneously parsing a steady stream of U.S. economic data. Between winter storms, geopolitical tensions and a confusing jobs report, the headlines looked messy. But beneath the noise, the macro story remains surprisingly stable: growth is holding up, productivity is improving and the Federal Reserve still has the luxury of patience. A reminder that while geopolitics can rattle markets, the global economy has become surprisingly resilient to shocks that once triggered recessions.

Executive Summary

• Economic momentum remains intact despite noisy data. Institute for Supply Management (ISM) surveys point to the strongest broad-based expansion since mid-2022.
• The labor market is stabilizing, even though February’s payroll report looked weak at first glance.
• Productivity growth is accelerating, potentially raising the economy’s long-term growth potential.
• Consumer spending faces short-term headwinds from higher gasoline prices and equity volatility but remains fundamentally supported.
• Markets are reacting to geopolitics more than fundamentals, with the Iran conflict likely to have only a modest macro impact if contained.

Growth Signals Flash Green: Manufacturing and Services Rebound
The most encouraging development this week came from the ISM surveys, which show the US economy entering 2026 with renewed momentum. The ISM manufacturing index held in expansion territory at 52.4 in February, supported by strong new orders and rising backlogs. Equally important, the services sector accelerated even further. The ISM non-manufacturing index rose to 56.1, pushing the combined composite index to its highest level since July 2022.

The details matter here. Demand indicators in both surveys point to continued strength:

• Manufacturing new orders remained elevated at 53.5, while backlogs rose to 56.6, indicating a growing pipeline of activity.
• In the services sector, new orders jumped to 58.6 and backlogs rose to 55.9, the first expansion reading in a year.

The ISM services report shows the composite index climbing back above 55, historically consistent with solid GDP growth. Looking ahead, Oxford Economics expects US GDP growth of about 2.8% in 2026, supported by fiscal policy, lower interest rates, strong household spending and AI-related investment.

Of course, there is a catch: the price components in manufacturing surged. The ISM prices index jumped 11.5 points to 70.5, driven partly by tariffs and rising commodity costs. In other words, demand is strong, but supply chains and geopolitics are keeping inflation risk in the conversation.

• Key Takeaway: The US economy appears to be reaccelerating early in 2026, with both manufacturing and services expanding simultaneously for the first time in years.

Labor Market Noise vs. Reality
At first glance, February’s employment data looked ugly. Non-farm payrolls fell by 92,000, well below expectations. However, one should be cautious when reading too much into the headline as several temporary factors distorted the numbers:

• A 31,000-worker healthcare strike temporarily reduced employment and
• Severe winter weather impacted several sectors.

When averaged across recent months, job growth remains roughly in line with the pace needed to stabilize unemployment. Over the past three months, private sector employment has averaged gains of about 18,000 jobs per month. Meanwhile, other labor indicators paint a similarly stable picture. Initial jobless claims remain low at 213,000, signaling limited layoffs. Although the unemployment rate edged up slightly to 4.4%, participation rates remain healthy.

One interesting nuance: hiring appears to be shifting toward smaller businesses. Firms with fewer than fifty employees added 60,000 jobs in February, accounting for most of the private payroll increase in the ADP report. However, small businesses are also the most sensitive to uncertainty and geopolitics and tariffs may weigh on hiring intentions.

• Key Takeaway: The labor market is not necessarily weakening, rather it is normalizing after an unusually strong post-pandemic expansion.

Productivity: The Quiet Macro Story
While most investors obsess over inflation prints and payroll numbers, the most important data point of the week may have been productivity. US productivity rose 2.8% annualized in Q4, continuing the strong gains seen over the past year. Even more impressive, productivity has grown 2.2% annually since 2019, one of the strongest performances of the past four business cycles.

Output per hour has trended upward across industries. Several forces are driving this trend:

• Technology adoption and AI;
• Efficiency improvements following pandemic-era disruptions; and
• Structural labor shortages pushing firms to automate.

Interestingly, this productivity surge occurred even as hours worked declined slightly, meaning firms produced more output with fewer labor inputs. This has two important implications:

1. It raises the economy’s potential growth rate.
2. It may lead to a “job-light” expansion, where output grows faster than employment.

In other words, productivity may be doing the heavy lifting that once required a large expansion in the workforce.

• Key Takeaway: Rising productivity could allow the US economy to grow faster without reigniting inflation — a rare macro “free lunch.”

Consumers: Weather, Gasoline and Wealth Effects
The consumer story this week was less straightforward. Retail sales declined 0.2% in January, but the drop appears largely weather-related as severe winter storms disrupted in-person spending. Auto sales illustrate the pattern clearly. Sales rebounded to 15.75 million annualized in February, a 6% increase from January after storms subsided.

However, several headwinds are emerging:

• The Iran conflict has pushed gasoline prices higher, potentially adding up to 0.3 percentage points to inflation this year.
• A 75-cent increase in gasoline prices could cost consumers about $70 billion annually, roughly 0.4% of total spending.
• The stock market has stalled, which may dampen spending by wealthier households.

That said, there are also tailwinds:

• Tax refunds this year are expected to be around 20% larger than last year, supporting discretionary spending.
• Lower interest rates and improving vehicle affordability should boost auto sales later in the year.

If anything, this looks less like a consumer slowdown and more like a weather-related pause.

• Key Takeaway: Consumer spending remains resilient, though higher energy prices and equity volatility could temporarily slow momentum.

Markets and the Iran Conflict
Markets spent the week reacting to geopolitical headlines rather than macro fundamentals. The strikes involving Iran have pushed oil prices higher and introduced volatility across financial markets; however, the economic impact may be relatively limited.

Oxford Economics estimates that temporarily higher energy prices would:

• Reduce global GDP growth by only 0.1 percentage points this year.
• Increase US inflation by roughly 0.3–0.4 percentage points in 2026.

Treasury yields remain stuck in narrow ranges:

• The two-year yield has traded between roughly 3.4% and 3.65% since September.
• The 10-year yield has been largely confined to a 4.0–4.2% range.

Equities have been volatile but remain close to record highs. The S&P 500 recently dipped to around 6,710 before rebounding above 6,800, still within the tight range that has prevailed since late 2025.

The likely outcome is that if the conflict is contained, markets will return to their prior trajectory.

• Key Takeaway: Markets are reacting to geopolitics, but the underlying economic fundamentals remain largely unchanged.

Final Thoughts: A Noisy Data Week
This week’s macro data had something for everyone:

• A weak jobs report
• Strong ISM surveys
• Rising productivity
• Volatile markets
• And gasoline prices seem determined to remind consumers that geopolitics still matters.

But when you step back, the broader picture looks surprisingly stable. Growth is holding up, the labor market is cooling but not cracking and productivity improvements are quietly raising the economy’s speed limit. Put differently: the macro environment feels a bit like March weather in the Midwest, occasionally stormy, but not enough to cancel spring.

And if the economy keeps producing more with fewer workers, investors may soon discover the rarest of macro phenomena: an expansion where productivity does the heavy lifting while inflation takes the day off. Now that would be an efficiency gain even an economist could love.

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