US business activity grows in June, but tariffs and inflation cloud outlook

US business activity continued to expand in June, although the pace of growth slowed, as tariffs and geopolitical tensions fuelled inflation and cast uncertainty over future growth. The latest flash data from S&P Global shows the Composite PMI Output Index slipped slightly to 52.8 from 53.0 in May (a reading above 50 indicated expansion and a reading below 50 shows contraction), still signalling growth but at a pace well below levels seen in late 2024. While output has now risen for 29 consecutive months, the June data highlights intensifying headwinds from rising input costs, shrinking exports, and geopolitical instability, especially following the recent escalation in West Asia.

Tariffs drive prices higher across sectors

The clearest concern emerging from the June report was the increase in inflationary pressures, driven heavily by tariff-induced price hikes. Nearly two-thirds of manufacturers citing rising input costs blamed tariffs, while over half linked higher selling prices to tariffs. The prices paid index for manufacturers surged to 70, the highest since July 2022, as companies dealt with increased import duties and passed the burden onto consumers. Price increases were also seen in the services sector, with firms reporting elevated costs due to tariffs, rising wages, fuel, and financing costs.

While competition in services helped moderate price growth somewhat compared to May, the overall inflation rate for goods and services was the second-highest since early 2023. S&P Global warned that the current price trajectory could see consumer inflation rise toward 4 per cent in the coming months.

Mixed signals on growth: Manufacturing up, exports down

A positive aspect of June’s data was the more balanced growth between manufacturing and services. Manufacturing output rose for the first time since February, even as service sector growth cooled modestly. However, the rise in domestic demand masked a worrying trend—a continued decline in exports. Service providers reported the sharpest quarterly drop in exports since late 2022, and manufacturers also saw a fall in overseas orders. Analysts noted that the decrease reflected the global trade disruption caused by tariff uncertainty and geopolitical tensions.

Adding to short-term momentum was a sharp build-up in inventories, with firms increasing purchases at the fastest rate in over three years. But S&P Global’s Chris Williamson warned that stockpiling, driven by fears of future price hikes and supply disruptions, is “likely to unwind in the coming months”.

Labour market shows resilience, but sentiment wanes

Despite economic uncertainties, businesses responded to rising workloads and backlogs by boosting hiring at the fastest pace in over a year. Manufacturing led the gains, with job creation reaching a 12-month high, while services hiring also strengthened.

Yet, business confidence dipped in June, especially among service providers, amid concerns over Trump-era policies like government spending cuts and trade protectionism. Manufacturers were marginally more upbeat, hoping to benefit from protectionist measures, but overall sentiment remains well below pre-2025 levels.

Fed expected to hold rates amid uncertain outlook

With inflation accelerating and demand moderating, the Federal Reserve is expected to pause further interest rate cuts. The central bank has held rates steady at 4.25-4.50 per cent since December 2024 after 100 basis points (bps) of cuts last year.

S&P Global’s data suggests stagflation risks are rising, as tariff-driven cost pressures and a slowing housing market threaten consumer spending. Despite a slight rise in May’s home sales, the pace was the weakest for that month since 2009, with high mortgage rates discouraging buyers.

Economists now expect the US economy to grow by under 1.5 per cent in 2025, the slowest pace since the global financial crisis, excluding the pandemic year of 2020.

While markets await clarity on US trade and foreign policy, the Fed is likely to stick with a “wait and see” approach to assess how durable current inflation and growth trends are before taking further action.