US Business Activity Stalls Amid Tariffs and Federal Spending Cuts

US business activity has come to a near-standstill in February, with S&P Global reporting a 17-month low in activity. This downturn follows a string of surveys indicating increasing anxiety among businesses and consumers due to the Trump administration's policies.

After Republican President Donald Trump's election victory in November, business and consumer sentiment surged on expectations of deregulation, tax cuts, and low inflation. However, concerns about the impact of government policies, particularly tariffs and spending cuts, have dampened sentiment.

S&P Global's flash US Composite PMI Output Index, tracking manufacturing and services sectors, fell to 50.4 in February, the lowest since September 2015. A reading above 50 indicates expansion in the private sector.

The services sector drove the decline in PMI, contracting for the first time since January 2015. Manufacturing activity, however, rose to an eight-month high, attributed to preemptive actions against potential cost increases and supply shortages related to tariffs.

Trump has imposed tariffs on imports from China and threatened similar duties on Mexico, Canada, Japan, EU, South Korea, India, and others. Additionally, government spending is being reduced, with thousands of federal employees, including scientists and park rangers, losing their jobs.

The S&P Global survey also found that inflation concerns were prevalent. Businesses' input prices rose to 58.5 from 57.4 in January, driven by tariff-related increases. Manufacturers passed on higher prices to consumers, potentially contributing to inflation.

Despite higher input costs, services businesses absorbed some of the increases due to slowing demand. This could ease inflation pressures in the future.

The Federal Reserve paused its interest rate cuts in January, having lowered rates by 100 basis points since September. However, the S&P Global survey showed a decrease in new orders (50.6) and employment (49.4), indicating potential economic headwinds.

Economists' expectations for a rise in manufacturing PMI to 51.5 were met, but the flash services PMI fell to 49.7, contracting for the first time in over two years and surprising economists who anticipated a reading of 53.0.