US Business Activity Plunges to 17-Month Low as Tariffs and Spending Cuts Spark Economic Fears

U.S. business activity nearly stalled in February, with the Composite PMI falling to a 17-month low of 50.4 due to declining services sector performance. Concerns over tariffs and deep federal spending cuts have fueled economic uncertainty, leading to job losses and weaker consumer sentiment. Inflation expectations surged, with 12-month projections hitting 4.3%, the highest since late 2023. The Federal Reserve remains cautious, delaying further rate cuts amid inflation risks. Tariffs have driven up manufacturing costs, with businesses passing price hikes to consumers. The housing market is also struggling, with sales falling 4.9% due to high mortgage rates. Experts warn that ongoing policy uncertainty and rising costs could further slow economic growth.

US Business Activity Plunges to 17-Month Low as Tariffs and Spending Cuts Spark Economic Fears

U.S. business activity nearly came to a halt in February as concerns over tariffs and federal spending cuts grew, wiping out gains made following President Donald Trump’s election victory. According to S&P Global’s latest report, the U.S. Composite PMI Output Index dropped to 50.4—the lowest level since September 2023—falling from 52.7 in January. This decline was largely driven by a contraction in the services sector, marking its first downturn since early 2023. Meanwhile, manufacturing activity hit an eight-month high, largely due to businesses stockpiling in anticipation of tariff-related cost increases and supply disruptions.

The report, conducted between February 10-20, highlighted growing uncertainty among businesses over the administration’s economic policies. Trump recently imposed a 10% tariff on Chinese imports, with a planned 25% tariff on Mexican and Canadian goods set for March. Additional duties on steel, aluminum, automobiles, semiconductors, and pharmaceuticals are also in the works. Simultaneously, deep federal spending cuts have led to widespread job losses across various sectors, including government agencies.

Consumer sentiment has also taken a hit, with the University of Michigan’s index dropping to a 15-month low of 64.7 in February. Inflation expectations are rising, with consumers projecting 12-month inflation at 4.3%, the highest since late 2023, and long-term inflation expectations reaching levels unseen since 1995.

The Federal Reserve, which has already cut interest rates by 100 basis points since September, signaled caution over potential inflationary pressures stemming from Trump’s policies. While market expectations suggest two possible rate cuts in 2025, concerns over a weakening economy appear to be taking precedence over inflation fears.

Tariffs have also driven up business costs, with manufacturers passing these increases on to consumers. The price paid index for manufacturing jumped from 57.4 in January to 63.5 in February, while overall business input costs reached their highest levels since late 2022. Though some service-sector businesses absorbed part of the cost, heightened competition and slowing demand have tempered inflationary pressures.

The economic slowdown is also impacting the housing market. Existing home sales fell by 4.9% in January, with high mortgage rates and rising home prices reducing affordability. Analysts warn that additional tariffs on building materials, such as lumber and appliances, could further strain housing affordability in the coming months.

Labor market conditions are also showing signs of strain, with businesses scaling back hiring due to economic uncertainty. The S&P Global report indicated that new orders for private businesses dropped significantly, signaling weaker demand. Additionally, corporate earnings reports from major retailers and manufacturers have pointed to shrinking profit margins, with companies citing higher input costs and declining consumer purchasing power.

Despite the economic headwinds, some sectors remain resilient. The technology industry has seen moderate growth, driven by ongoing investments in artificial intelligence and cloud computing. However, rising costs of semiconductor imports due to potential tariffs could disrupt supply chains and impact production.

Experts warn that unless economic policies shift to mitigate inflationary pressures and stabilize consumer confidence, the U.S. economy could experience further stagnation in the coming months. The combination of high borrowing costs, weak consumer spending, and rising trade tensions presents a challenging outlook for businesses and investors alike.