U.S. business activity showed signs of improvement in March, but growing concerns over import tariffs and substantial government spending cuts continued to dampen business sentiment and cloud the economic outlook for the remainder of the year.
According to the latest survey from S&P Global, business activity picked up this month, with the flash U.S. Composite PMI Output Index, which tracks both the manufacturing and services sectors, rising to 53.5 from 51.6 in February. A reading above 50 indicates expansion, suggesting that the private sector is regaining momentum after a brief slowdown. The increase was largely driven by a recovery in the services sector, partly fueled by warmer weather, though manufacturing fell back into contraction territory after two months of growth.
Despite the uptick in business activity, concerns persist about the broader economic picture. Consumer sentiment has worsened, with households expressing worries about the future amid high inflation. Business confidence has also taken a hit, mainly due to fears over the effects of recent policy changes under the Trump administration. Specifically, tariffs on imports and the government’s aggressive spending cuts have raised concerns about potential negative impacts on economic stability.
S&P Global’s chief business economist, Chris Williamson, noted, “Business confidence in the outlook has also darkened… largely caused by growing worries over negative impacts from recent policy initiatives.” These concerns were particularly centered on federal spending cuts and tariff hikes, which have contributed to uncertainty in the business environment.
While the PMI data points to a recovery in activity, it does little to ease fears that the economy may experience slow growth and persistently high inflation in the coming months. GDP growth for the first quarter is expected to remain under 1.5% annualized, down from a 2.3% growth rate in the fourth quarter of 2024. The Federal Reserve’s latest forecast has also downgraded its 2025 growth projection to 1.7%, down from 2.1% in December.
The survey also revealed that the prices paid by businesses for inputs surged to their highest level in nearly two years, driven by rising manufacturing costs and higher staffing expenses. The measure of prices paid by businesses for inputs increased to 60.9, up from 58.4 in February. This uptick in costs is being passed on to consumers, with manufacturers raising prices, while services businesses are also facing pressure, though their ability to hike prices is limited by weakening demand.
Although the services sector remains relatively subdued in terms of inflation, it still faces challenges. “From the Fed’s perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits,” Williamson explained.
In terms of employment, the survey indicated a slight improvement, with the measure of employment rising to 50.6 from 49.4 in January, suggesting a modest pickup in hiring. However, businesses remain cautious, and job creation has not yet picked up significantly.
While the recent data suggest some recovery, the broader economic picture remains uncertain, with challenges such as tariff-related cost pressures, high inflation, and concerns about government spending cuts continuing to weigh on sentiment.
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