US Business Activity Increases in June Amid Tariffs and Inflation Challenges

U.S. Business Activity Shows Signs of Growth Amid Rising Inflation and Geopolitical Tensions

U.S. business activity experienced continued expansion in June, although the momentum has slowed significantly compared to earlier months. The latest flash data from S&P Global points to this trend, revealing that the Composite PMI Output Index decreased slightly to 52.8 from 53.0 in May. A reading above 50 indicates business growth, while below 50 indicates contraction. This persistent growth marks the 29th month of increased output, yet it is tempered by rising inflationary pressures and declining export numbers.

Tariffs Drive Prices Higher Across Sectors

One of the most pressing concerns highlighted in the June report is the rise in inflation driven primarily by tariff-induced price hikes. Nearly two-thirds of manufacturers reported increased input costs attributed to tariffs, with over half passing these costs onto consumers through higher selling prices. This has contributed to a significant spike in the prices paid index for manufacturers, which surged to 70, marking the highest level since July 2022. Elevated costs have also permeated the services sector, where businesses reported rising expenses linked to tariffs, wages, fuel, and financing.

While some competitive pressures in the services sector have helped moderate price growth, the overall inflation rate for goods and services registered as the second-highest since early 2023. Analysts at S&P Global have cautioned that this trajectory may push consumer inflation towards 4% in the near future.

Mixed Signals on Growth: Manufacturing Up, Exports Down

On a more positive note, the reported data shows a shift towards balanced growth between the manufacturing and services sectors. Manufacturing output rebounded for the first time since February, although service sector growth cooled somewhat. A concerning trend is emerging, however, as the rise in domestic demand obscures an ongoing decline in exports. Service providers reported the sharpest quarterly drop in exports since late 2022, and manufacturers noted a slump in overseas orders. Analysts attribute these declines to the global trade disruptions exacerbated by tariff uncertainty and geopolitical tensions.

Despite these challenges, firms are building up inventories at the fastest rate in over three years, driven by concerns about future price increases and potential supply chain disruptions. However, Chris Williamson from S&P Global warned that this stockpiling is likely to reverse in the coming months as businesses reassess their inventory needs.

Labor Market Shows Resilience, but Sentiment Wanes

In the context of these economic challenges, the labor market shows a degree of resilience. Businesses have responded to increasing workloads and backlogs by significantly boosting hiring, achieving the fastest pace in over a year. Manufacturing saw job creation reach a 12-month high, and the services sector also reported increased hiring.

Yet, despite these positive employment figures, business confidence dipped in June, particularly among service providers. Concerns surrounding policies from the Trump administration, including potential spending cuts and trade protectionism, have dampened sentiment. While manufacturers remain cautiously optimistic, hoping to benefit from ongoing protectionist measures, overall sentiment is still below pre-2025 levels.

Fed Expected to Hold Rates Amid Uncertain Outlook

Given the accelerating inflation and moderating demand, the Federal Reserve is likely to pause any further interest rate cuts. The central bank has maintained rates at 4.25-4.50% since December 2024, following a series of cuts last year amounting to 100 basis points.

S&P Global’s data suggests that risks of stagflation are increasing, as tariff-induced cost pressures and a cooling housing market could dampen consumer spending. Although home sales saw a slight uptick in May, they reflect the slowest pace for that month since 2009, with high mortgage rates continuing to deter potential buyers.

Economists now project that the U.S. economy will grow by less than 1.5% in 2025, marking the slowest growth rate since the global financial crisis, aside from the pandemic year of 2020. As markets anticipate clarity regarding U.S. trade and foreign policy, the Federal Reserve is likely to adopt a "wait and see" strategy to evaluate the durability of current inflation and growth trends before taking any further action.