U.S. Business Activity: A Mixed Bag Amid Rising Inflation Pressures

U.S. business activity showed signs of slowing in June, with the S&P Global survey revealing some notable trends influenced by President Donald Trump’s aggressive tariff policies. This slowdown, coupled with increasing prices, raises red flags for economists who anticipate a significant uptick in inflation during the second half of the year.

Tariffs and Their Impact on Prices

The recent survey highlighted that measures of prices paid by manufacturing factories for inputs and those charges for finished products surged to levels reminiscent of 2022. Alarmingly, nearly two-thirds of manufacturers pinpointed tariffs as the main reason for rising input costs. Additionally, just over half of the respondents attributed the hikes in selling prices to these tariffs. This correlation reinforces the belief that tariffs are playing a significant role in driving inflation.

For some time, inflation appeared to lag behind expectations, primarily because businesses were utilizing stocks they had built up before the implementation of the tariffs. However, this trend seems to be changing, as pressures from these tariffs become more evident in the marketplace.

Economic Indicators: Mixed Messages

The S&P Global’s flash U.S. Composite PMI Output Index, a key indicator tracking both manufacturing and services sectors, experienced a slight decline to 52.8 in June from 53.0 in May. Scores above 50 indicate expansion, suggesting that while growth is still occurring, it is at a diminished pace.

In the manufacturing sector, the flash PMI remained steady at 52.0, frustrating economists who had predicted a drop to 51.0. Conversely, the flash services PMI dropped to 53.1 from 53.7, indicating a minor contraction in that area as well.

The Uncertainty Factor

Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that while the economy continues to grow as the second quarter closes, the outlook is clouded by rising inflationary pressures. Difficulties in predicting economic momentum are heightened by the uncertainty fueled by ever-evolving tariff policies.

Hard data surrounding retail sales, housing, and labor markets paint a picture of a softening economy. The current geopolitical tensions—particularly the escalations in the Middle East—also contribute to this uncertainty, which can further complicate business decisions and consumer confidence.

Inflation Trends: Rising Costs Ahead

Interestingly, while the measure of new orders received by businesses dipped to 52.3 from 53.0, prices paid by businesses for inputs did see a drop to 61.6 from 63.2, suggesting a mixed bag of findings. Manufacturers, however, reported soaring input costs, with the measure jumping to 70.0 this month—the highest since July 2022.

This increase in costs is more pronounced among service businesses, where tariffs, higher financing, wages, and fuel costs were cited. Despite this, competition seems to moderate the pace at which prices are rising in this sector.

Manufacturers are passing their increased costs onto consumers, with the prices charged gauge soaring to 64.5 from 59.7 in May, again the highest since mid-2022. Rising oil prices, partly a consequence of Middle Eastern tensions, serve as another inflationary catalyst that businesses must navigate.

Federal Reserve’s Position

In a recent move, the Federal Reserve opted to maintain their benchmark overnight interest rate between 4.25% and 4.50%, unchanged since December. Fed Chair Jerome Powell expressed expectations of "meaningful" inflation in the near future. This data aligns with speculation that the Federal Reserve may keep interest rates steady for an extended period, taking the time to evaluate how the economy withstands inflationary pressures and tariff-related impacts.

Employment Trends

Despite these economic hurdles, there was a noted uptick in employment for June, largely driven by manufacturing, where some factories are currently facing order backlogs. Williamson suggested a slight increase in optimism among manufacturers, possibly due to expectations of benefits from trade protectionism. However, this optimism is tempered with the understanding that general sentiment remains less buoyant than prior to Trump’s presidency.

The landscape of U.S. business activity in June illustrates a complicated narrative of gradual growth amidst rising costs and geopolitical uncertainties.