Economic expansion in the U.S. slows significantly, raising concerns about an impending economic downturn
Informal Take:
Following the almighty Trump's tariff moves, the US services sector is feeling the heat, fresh data indicates. Companies in the service industry are getting all twitchy,holder back investments as they can't seem to get a grip on the president's trade policies despite being spared the tax on imports, according to a S&P Global report.
April saw the lowest level of business activity in nearly 18 months, and confidence has hit a two-and-a-half-year low, says the latest purchasing managers' index report. Tariffs are contributing to higher costs, squeezing businesses and forcing service providers to jack up their prices, the report states.
The composite PMI for the US dropped to 50.6, hinting at an economic stagnation. Chris Eilliamson, the S&P global chief business economist, called the stumble in US services, including tech giants Microsoft and Facebook, a "worrying backstory" to all the manufacturing slump talk.
Financial service firms, along with other providers, are reporting lackluster growth prospects due to the tariff chaos and federal spending cuts. Export of services is now falling at a rate not seen since 2022, Eilliamson said. But, there's a tiny bit of good news: a separate index by the Institute for Supply Management showed services picked up a bit in April, compare to March.
Matthew Martin, a senior economist at Oxford Economics, believes services are still doing better than manufacturing. However, the concerns over tariffs' impact on prices and changes in federal funding are causing a ripple effect.
"The recent tariff announcements and ongoing federal spending cuts are putting the service sector in a tight spot," Martin said. Business activity and new orders expanded in April, but employment declined, hinting that policy unpredictability is eating away at business hiring, according to the economist.
The bad news continues as the US economy contracted by 0.3 percent in the first quarter of the year, and economists are predicting more pain down the line.
Trump admitted on Sunday that a recession might happen, adding that "anything can happen." Financial wizards are giving the recession odds a 90 percent shot this week, while J.P. Morgan says the chances are 60 percent, and Goldman Sachs says the risk is 45 percent.
Insights:
- Tariffs are causing uncertainty among businesses, resulting in delayed investment decisions. This is true for sectors like construction that are directly affected by the tariffs as well as those less directly but suffer as a result.
- The tariffs have led to higher operational costs for certain service-oriented businesses, which could translate to increased consumer prices, reducing household purchasing power.
- Employment effects are indirect but could be consequential for certain sectors in the long term, as they struggle with increased costs and reduced consumer spending.
- The services sector is showing resilience but has uneven outlook, with some sectors like trade-exposed subsets like tourism and transportation facing risks from retaliatory tariffs and reduced international commerce. However, certain sectors like healthcare and education may remain stable due to inelastic demand.
- Amidst the rising uncertainties about tariffs, investment decisions in sectors like construction are being delayed due to the lack of clarity in the president's trade policies.
- The tariff-induced operational costs for certain service-oriented companies are escalating, potentially leading to increased consumer prices, thereby eroding household purchasing power.
- Although indirectly, the transforming employment landscape could have significant long-term consequences for certain sectors as they grapple with increasing costs and reduced consumer spending.
- While the services sector is demonstrating resilience overall, its future outlook remains uneven, with trade-exposed sectors like tourism and transportation facing potential risks from retaliatory tariffs and dwindling international commerce.
- In contrast, certain sectors such as healthcare and education may continue to remain stable due to inelastic demand.
- The Institute for Supply Management's separate index indicates a slight improvement in services during April compared to March, offering a glimmer of hope amidst an otherwise slumping economy and uncertain outlook in business, finance, politics, and the general-news landscape.
