Shaky Ground | Keeping Connected
Keeping Connected Newsletter • March 16, 2026
Is the U.S. Economy Teetering on Recession?
The U.S. economy shed 92,000 jobs in February, well below the expectation for a 50,000 gain. This marked the third time in five months that the economy lost jobs. Health care, the primary driver of payroll growth, lost 28,000 jobs largely due to a strike at Kaiser Permanente that sidelined more than 30,000 workers in Hawaii and California.
Average hourly earnings in-creased 0.4% for the month and 3.8% from a year ago, both 0.1% above forecast. The broader U6 unemployment rate fell to 7.9%
One additional area of concern was the labor participation rate, which dropped to 62% or, its lowest level since December 2021. Given the crackdown on immigration in the U.S., economists believe the breakeven level of job growth is in the 30,000-40,000 range.
Although one month does not make a trend, this was a disappointing jobs report, but it could lead to additional interest rate cuts if oil prices and inflation come down.
Fourth-quarter GDP came in below expectations in the advance reading. GDP rose at an annualized rate of just 1.4%, well below the estimate for a 2.5% gain. Consumer spending increased at a slower pace in Q4, while government spending tumbled sharply in a quarter marked by the record-length shutdown.
The government shutdown was estimated to cost growth about 1% in Q4, although the exact impacts cannot easily be quantified. Consumer spending rose 2.4% in Q4, down from 3.5% in Q3. For the full year, the U.S. economy grew at a 2.2% pace, down from the 2.8% increase in 2024.
Retail Sales Disappoint, Conflicting Messages on Inflation Prior to Iran War
U.S. retail sales fell 0.2% M/M in January, the largest decline since May 2025. Retail sales declined across most categories in January, with the largest declines at department stores (-6%), personal care shops (-3%), and gasoline stations (-2.9%). The dip in retail sales partly reflected a 0.9% decline in motor vehicle and parts dealership sales, which had edged down 0.2% in December. Core retail sales, which are a proxy for consumer spending trends in the GDP report, rose 0.3% M/M.
February's CPI report was in line with expectations and perhaps the last to reflect cooling inflation. Headline prices rose 0.3% M/M or 2.4% Y/Y. Core CPI increased 0.2% M/M or 2.5% Y/Y.
Rent rose just 0.1%, the smallest monthly increase since January 2021. In contrast, the PCE Index rose 2.9% in December with core PCE increasing 3%. In December, goods inflation rose 0.4% M/M, and services inflation increased 0.3%. Wholesale inflation also came in hotter than anticipated last month, perhaps a sign of tariffs working their way through the economy.
Source(s): U.S Bureau of Labor Statistics, CNBC
Manufacturing & Services Show Signs of Life in U.S. & Eurozone
The ISM Manufacturing PMI edged lower in February, with the headline reading falling to 52.4 (from 52.6 in January). New orders and production weakened in February while prices and employment strengthened. Survey respondents cited improving business activity overall, with building cost pressures.
The U.S. service sector saw an acceleration in activity in February, with the headline reading rising to 56.1 from 53.8 in January. New orders, employment, and production all strengthened.
The HCOB final manufacturing Purchasing Managers' Index rose to 50.8 in February from 49.5 in the previous month. Factory output increased in February, accompanied by a rise in new orders, but employment continued to weaken across the eurozone. Input costs also increased at the fastest clip in 38 months.
Among the big four economies, Germany returned to growth for the first time in over three-and-a-half years. The broader composite PMI for the region increased from 51.3 in Jan-uary to 51.9 in February.
EMs Are Off to a Strong Start, But Beware of Higher Energy Prices
Emerging markets have surged nearly 15% through the first two months of 2026, driven by broad-based gains across Latin America, Eastern Europe, and Asia ex-China. This is largely an extension of strong gains that started in early 2025.
We believe the backdrop for EMs remains favorable, with GDP growth that should far exceed that of most developed markets, cheap relative valuations, potential USD weakness, AI hardware (TSMC chips), and tailwinds from commodities.
All eyes are on oil and gas prices across the globe that have surged nearly 30% since the start of the U.S. and Israel air campaign against Iran. The Strait of Hormuz is one of the world's vital chokepoints where roughly 20% of global oil and gas passes through this narrow shipping lane.
Most of the oil and gas today is going to China and India, which are reliant on energy imports. Iran has essentially closed the Straight of Hormuz to shipping traffic for now, and the U.S. is considering naval escorts to help address the problem.
This is a huge risk due to the potential for mines and missiles hitting either naval warships or tankers, and any negative developments could lead to further increases in energy prices.
Nature's Symphony
Source(s): U.S Energy Information Administration
Software Sector Has Been Routed Thus Far in 2026
There is a lot of focus on the software sector of the global economy and the potential disruption it faces from AI. Many of the largest U.S. software companies were the best performers in 2025, but the entire sector has been routed thus far in 2026. Names like Pal-antir surged 135% in 2025, but have fallen ~20% YTD. The YTD losses are worse in names like Applovin, Uni-ty, Pega, and Oracle.
There is virtually zero correlation between 2025 performance and YTD drawdown, reinforcing that this is a sector-wide repricing, not a stock-picking story.
In addition, there were 10 high-profile enterprise software IPOs in 2025, and while most had a solid first day of trading, all but one ended the year with significant losses. While we believe this is partially related to the broader sector rerating, we also think these companies chose to remain private longer, with most of the valuation gains occurring during that period.
We fear this may be the case with many of the high-profile unicorns patiently awaiting their turn at an IPO.
Japan Barely Misses Recession, China Lowers Target Growth to 4.5-5% Range
Japan's economy grew 0.1% in Q4 2025, narrowly missing a technical recession after GDP fell 0.7% in Q3. Private consumption drove the modest expansion, offsetting weakness in exports and public spending.
The Bank of Japan in January raised its economic growth forecast for the fiscal year ending March 2026 to 0.9% from 0.7%. It also lifted its fiscal 2026 outlook to 1% from 0.7%. Japan's inflation slowed sharply to 2.1% in December, its lowest level since March 2022. Still, prices have remained above the Bank of Japan's 2% target for 45 consecutive months.
China's economy is struggling with internal structural adjustments, including ongoing economic downside risks, a sharp decline in foreign investment, high youth unemployment, weak consumption momentum, and a sluggish real estate market. Massive government subsidies in China have led to industrial overcapacity, involution-style competition, and stagnant prices or even deflation.
China's economy is also facing increasingly high external risks, as its unfair competitive practices and overcapacity have triggered an ongoing tariff and technology war with the U.S. The Chinese economy continues to slow, and the government officially lowered its growth target to 4.5-5%.
Market Review
- U.S. equities struggle in February on the surface, largely due to weakness in Mag 7 and other large-cap tech stocks.
- Growth underperformed value across all market capitalizations, and small caps continue to lead large caps in 2026.
- The S&P 500 equal-weighted index leads the market-cap-weighted index YTD.
- Stocks outside of the U.S. posted solid gains, driven by emerging markets, value stocks, and small caps.
- EAFE markets outperformed the U.S. equities, with the best gains coming from Japanese equities
- EMs rose another 5.5% in February, with strong gains coming from Latin America and Asia ex-China
- USD volatility hurt EAFE returns by 83 bps, but boosted EM returns by 54 bps.
- Fixed income markets worldwide posted strong gains in February as rates declined and investors clipped coupons.
- The decline in interest rates was particularly good for core fixed income and municipal bonds.
- Credit continues to broadly display healthy fundamentals and near-historic tight spreads. Despite the noise, most of the weaknesses have occurred in the lowest quality issues.
- Hedge funds broadly gained 1.9% in February, led by strength in global macro and equity L/S strategies. Relative value and event-driven strategies also posted modest gains.
- Real assets performed very well in February, with strong gains in listed infrastructure, REITs, and MLPs.
- Markets were off to the races through the first two months of 2026, but there has been a significant reversal in March with the Iran developments.
- Energy prices and Treasury yields have surged higher while the USD has strengthened and risk assets have sold off.
- It is important to remain calm and not make any irrational changes to a long-term strategic plan.
Note: For informational purposes only. Not an investment recommendation. The views expressed are those of Meramec Financial Planners LLC's advisory representatives as of the date of this newsletter. Opinions and any forward-looking statements expressed in this newsletter are subject to change without notice and are not guarantees of future performance. Historical performance figures for the indices are provided for illustrative purposes only and do not represent any actual investments. Index performance assumes reinvestment of distributions. The Indices are unmanaged, and you cannot invest directly in an index. Past performance is no guarantee of future results. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
