By Lucia Mutikani
US business activity slowed to an 11-month low in March as the war in the Middle East raised prices for energy products and other inputs, a survey showed on Tuesday, reinforcing fears of an acceleration in inflation in the months ahead.
The S&P Global survey also shows a deterioration in sentiment that contributed to the first decline in private-sector employment in just more than a year. The findings at face value would suggest persistent labour market weakness, though timely data such as weekly claims for unemployment benefits have remained consistent with stable conditions.
“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,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Companies are reporting a hit to demand from the additional uncertainty and cost-of-living impact generated by the conflict.”
S&P Global said its flash US composite PMI output index, which tracks the manufacturing and services sectors, fell to 51.4 this month. That was the lowest level since last April and followed a 51.9 reading in February.
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
— Chris Williamson, chief business economist at S&P Global Market Intelligence
The PMI has now declined for two consecutive months. A reading above 50 indicates expansion in the private sector. The drop this month was in the services sector, with the flash PMI there slipping to 51.1 from 51.7 in February. Economists polled by Reuters had estimated the services PMI easing to 51.5.
Manufacturing activity improved, with the flash PMI rising to 52.4 from 51.6 in February, and confounding economists’ expectations for a drop to 51.3, partly reflecting “some softening of the tariff impact on order books”.
The US-Israeli war with Iran sent oil prices surging more than 30%, and average national petrol prices increased nearly 26c per litre, stoking fears of inflation. Oil prices fell to a one-week low on Monday after President Donald Trump said he will postpone any military strikes against Iranian power plants for five days.
S&P Global said its measure of prices paid by businesses for inputs jumped to 63.2 this month from 60 in February, with services and manufacturing enterprises reporting increases, “widely linked to the war-related spike in energy costs and tightening supply conditions”.
Those higher prices were passed on to consumers. A gauge of output prices rose to 58.9 from 56.9 in February. S&P Global said the survey’s price gauges point to consumer price inflation racing back to about 4%.
Economists are bracing for an increase in inflation, with producer prices rising before the Middle East conflict. The Federal Reserve last week left interest rates unchanged and projected higher inflation, steady unemployment and a single reduction in borrowing costs this year.
“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,” said Williamson.
The survey’s measure of private-sector employment dropped to 49.7, the first contraction in 13 months, from 50.4 in February, pulled down by services industries and attributed to firms reducing “overheads in the uncertain economic climate”.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.