U.S. Business Activity Slows Amid Tariff Pressures, Inflation Outlook Remains Stable

U.S. Business Activity Slows Amid Tariff Pressures, Inflation Outlook Remains Stable

Washington, D.C. — September 23, 2023 — U.S. business activity has experienced a slowdown for the second consecutive month in September, according to a recent survey by S&P Global. While firms continue to voice concerns over rising costs due to tariffs, they are refraining from passing these costs onto consumers, a trend that could signal a more stable inflation outlook.

The S&P Global flash U.S. Composite PMI Output Index, which gauges activity across the manufacturing and services sectors, dipped to 53.6 this month, down from 54.6 in August. A reading above 50 indicates expansion, but the decline raises questions about the sustainability of growth in the current economic climate.

Federal Reserve Chair Jerome Powell addressed the situation, suggesting that while tariffs may lead to a temporary increase in price levels, the overall impact on inflation could be manageable. “Near-term risks to inflation are tilted to the upside,” Powell noted, emphasizing that the Fed is closely monitoring these developments.

Despite a recent uptick in inflation, prices have not surged as dramatically as anticipated when former President Donald Trump initiated sweeping tariffs. Many consumers are becoming more selective, and businesses are selling off inventory accumulated prior to the imposition of these duties.

“Producers are absorbing a substantial portion of the tariffs,” said Samuel Tombs, chief economist at Pantheon Macroeconomics. “The S&P’s survey should reassure the Fed about the inflation outlook.”

The survey revealed that while input prices for businesses rose to 62.6 from 60.8 in August, the prices charged for goods and services fell to 56.0 from 58.3. This decline indicates that firms are struggling to pass on increased costs to consumers, largely due to weak demand and heightened competition.

Chris Williamson, chief business economist at S&P Global Market Intelligence, cautioned that the data still suggests consumer inflation may remain above the Federal Reserve’s 2% target in the coming months.

The Fed recently cut interest rates by 25 basis points, bringing the benchmark overnight rate to a range of 4.00%-4.25%. This decision was largely influenced by a weakening labor market, with nonfarm payroll gains averaging only 29,000 jobs per month over the past three months, a stark decline from 82,000 during the same period last year.

New orders for businesses have also seen a slight decrease, particularly in manufacturing, while export orders remain subdued. The survey noted a growing number of companies struggling to fill vacant positions, indicating a shift towards cost-cutting measures in the manufacturing sector.

As businesses navigate these challenges, the outlook remains cautiously optimistic. The ability to absorb tariff costs without significantly raising prices could provide a buffer against inflationary pressures, allowing the economy to stabilize in the face of ongoing uncertainties.

For more insights into innovative solutions to global crises, consider subscribing to the Reuters Beacon newsletter.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci