US Business Activity Rebounds As Services Growth Outpaces Forecasts, Yet Cost Pressures Intensify

U.S. business output surged in March, powered by a stronger-than-expected rebound in services activity that challenged recession fears. However, mounting cost pressures from tariffs continue to weigh on business confidence.

According to flash business surveys released Monday by S&P Global, the Composite Purchasing Managers Index, which tracks manufacturing and services, climbed to 53.5 in March, up from 51.6 in February. A reading above 50 indicates expansion, and the latest jump marks the strongest pace of private sector growth in 3 months.

The upside surprise came almost entirely from the services side. The S&P Global Services PMI Flash surged to 54.3, decisively beating consensus expectations of 50.8, and up sharply from 51 in the previous month.

Yet, according to Chris Williamson, economist at S&P Global, part of the March upturn in services activity may reflect a temporary bounce following severe weather disruptions earlier in the year.

By contrast, manufacturing showed signs of softening. The S&P Global Manufacturing PMI Flash fell to 49.8, below both February's 52.7 and market expectations of 51.8, dipping back into contractionary territory.

Business Confidence Falls

Despite the overall improvement in output, companies reported growing unease about the months ahead.

Business expectations for the year dropped to their second-lowest level since October 2022, particularly among service providers. Firms cited deepening concerns over customer demand, higher costs, and policy uncertainty.

"Business confidence in the outlook has also darkened," Williamson said, noting that sentiment has "soured further from the buoyant mood seen at the start of the year to one of the gloomiest readings seen over the past three years."

The new Trump administration's policy moves, particularly federal spending cuts and tariffs, were most frequently cited as sources of concern. While manufacturers maintained relatively higher optimism—linked to potential tax relief and trade support—service sector confidence deteriorated for a third straight month.

Inflation Pressures Surge On Tariffs And Labor Costs

A warning sign in the March PMI data was a sharp acceleration in input costs, especially in manufacturing, where price inflation hit a 31-month high. Overall input costs across both goods and services rose at the fastest pace in nearly two years, with tariffs and rising labor expenses blamed as primary drivers.

"A key concern over tariffs is the impact on inflation, with the March survey indicating a further sharp rise in costs as suppliers pass tariff-related price hikes on to US companies," Williamson said.

Manufacturers increased their selling prices faster in 25 months, while service providers saw a more modest rise, constrained by the need to keep prices competitive amid fragile demand. The combined output price increase was the second largest in six months, yet still below the survey's long-run average.

“Firms’ costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers,” Williamson said.

GDP Seen Slowing, But Not Contracting: Stocks Rally

The survey results suggest the U.S. economy is growing at an annualized pace of 1.9% in March, according to S&P Global estimates, with growth slowing to just 1.5% over the first quarter—a clear deceleration from the final quarter of 2024.

While the report tempers near-term recession fears, it contrasts sharply with the Atlanta Fed's GDPNow model, which currently projects a 1.8% contraction for the first quarter.

U.S. stocks rallied Monday morning as stronger-than-expected PMI data eased recession concerns and reignited risk appetite on Wall Street.

By 10:10 a.m. ET, the S&P 500 index – which is tracked by the SPDR S&P 500 ETF Trust SPY – climbed 1.2%, while the Nasdaq 100 gained 1.5%, led by a rebound in growth and tech names.

Tesla Inc. TSLA jumped 8% and Palantir Technologies Inc. PLTR rose 5%, ranking among the session's top performers. Within the Magnificent 7, Meta Platforms Inc. META also advanced nearly 4%.

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