U.S. business activity decelerated in March, slipping to an 11-month low as the war in the Middle East pushed energy and other input costs higher, according to a flash survey published by S&P Global. The deterioration in sentiment coincided with the first contraction in private-sector employment in 13 months, though other high-frequency labor indicators have not shown the same weakening.
Survey readings and sector differences
S&P Global reported its flash U.S. Composite PMI Output Index, which aggregates performance across manufacturing and services, at 51.4 for March, down from 51.9 in February. That reading is the lowest since last April and marks the second straight month of decline. A reading above 50 still signals overall expansion but at a reduced pace.
The services sector drove the overall slowdown. S&P Global's flash services PMI eased to 51.1 in March from 51.7 in February - a softer outcome than the Reuters poll of economists, which had expected the services PMI to moderate to 51.5. By contrast, manufacturing activity strengthened: the flash manufacturing PMI climbed to 52.4 from 51.6 in February, confounding expectations for a fall to 51.3. S&P Global noted that part of the manufacturing improvement reflected some softening of tariff impacts on order books.
Prices and pass-through to consumers
Businesses reported notable increases in costs for inputs. S&P Global's measure of prices paid by companies jumped to 63.2 in March from 60.0 in February, with both services and manufacturing firms citing increases in costs. The survey linked these price rises widely to the war-related surge in energy costs and to tighter supply conditions.
Those higher input costs were largely passed on to buyers. The survey's gauge of output prices climbed to 58.9 from 56.9 in February. S&P Global said the survey's price gauges pointed to consumer price inflation racing back toward around 4%.
The immediate price shocks followed a sharp move in oil and gasoline markets tied to the U.S.-Israeli war with Iran, during which oil prices surged more than 30% and average national gasoline prices rose by nearly $1 per gallon. Oil later eased to a one-week low after President Donald Trump said he would postpone any military strikes against Iranian power plants for five days.
Employment and broader implications
S&P Global's measure of private-sector employment fell to 49.7 in March from 50.4 in February, representing the first contraction in 13 months. The decline was concentrated in services industries and was attributed in the survey to firms trimming overheads in an uncertain economic climate. While the PMI employment gauge signals softer conditions, S&P Global noted that timely labor market indicators such as weekly claims for unemployment benefits have remained consistent with stable conditions.
Commenting on the results, Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "The flash PMI survey data for March signal an unwelcome combination of slower growth and rising inflation following the outbreak of war in the Middle East. Companies are reporting a hit to demand from the additional uncertainty and cost-of-living impact generated by the conflict."
Monetary policy context
The survey's findings arrive in the wake of the Federal Reserve's recent decision to hold interest rates steady. The Fed's projections published last week included an expectation of higher inflation, stable unemployment, and a single reduction in borrowing costs this year. Williamson highlighted the policy trade-offs the central bank faces: "The Fed will therefore need to juggle these intensifying upside risks to inflation against the growing risk of the economy losing growth momentum, with much depending on the duration of the war and its impact on energy prices and global supply chains."
What the data imply
At face value, the survey points to a U.S. private sector contending with slower demand growth in services alongside a manufacturing sector that has, for now, shown modest resilience. Both sectors reported higher input costs and passed some of those costs through to consumers, supporting S&P Global's caution that consumer price inflation could accelerate back toward roughly 4% if the current trends persist.
Overall, the flash PMI portrays an economy facing a delicate mix: decelerating activity, upward pressure on prices, and a labor market that shows signs of softening in PMI measures even as weekly unemployment claims remain steady.