Energy News Beat
But “competition limited the pass-through of higher costs to selling price … which will harm profits.”
By Wolf Richter for WOLF STREET.
Overall economic growth accelerated in March from February, driven by a sharp acceleration in services activity, which bounced off the 15-month low in February – with “companies reporting improved new business inflows amid some signs of strengthening customer demand and better weather compared to earlier in the year.”
Some of the businesses reported that the acceleration in services comes “after adverse weather conditions had dampened activity across many states in January and February.”
Manufacturing pulled back in March from the spike in February, which had been the largest increase in output since May 2022, according to the “flash” composite Purchasing Managers’ Index by S&P Global today.
“Factories reported fewer instances of output having been buoyed by the front-running of tariffs, and new orders growth came close to stalling in the goods-producing sector. Input buying in the sector also fell back into decline,” the report said.
“However, export sales showed the smallest decline for nine months thanks to rising orders in particular from Canada, Germany and other EU countries, hinting at some further efforts to fulfil orders ahead of tariff implementation,” the report said.
Employment rose “slightly” in March from February, led by renewed hiring in services, while manufacturers cut headcount for the first time since October.
Indicative of 1.5% Q1 real GDP growth.
The services and manufacturing survey data are “indicative of the economy growing at an annualized 1.9% rate in March and just 1.5% over the quarter as a whole, pointing to a slowing of GDP growth compared to the end of 2024,” when real GDP grew by 2.3%.
So slower growth than in Q4, and slower than the 15-year average of 2%, and a tad slower than Q1 2024 (1.6%), but it would be far better than the recession everyone has been clamoring about.
“Competition limited the pass-through of higher costs to selling price.”
Input prices – cost for companies, including staffing costs – “accelerated sharply, especially in manufacturing, to a near two-year high, often attributed to the impact of tariff policies,” the report said.
“Cost pressures intensified across the economy in March. Across both goods and services, input costs increased at the sharpest rate for 23 months, surging especially in manufacturing (where the rate of inflation hit a 31-month high) but also picking up further pace (to an 18-month high) in the service sector.”
“Higher costs were first and foremost attributed to tariffs, though increased staffing costs were also widely reported,” the report said.
“Higher costs fed through to a steeper rise in manufacturing selling prices, which rose in March at the sharpest rate for 25 months.”
Many of these manufacturers’ customer are not retail customers, where measures such as CPI track inflation, but other companies, including construction companies, companies assembling the components or materials into finished goods, etc. And there often is another layer, such as retailers, between them and consumers. And passing price increases on through that chain is very difficult. Big retailers – from Walmart and Target on down – are currently in tough negotiations with their foreign supplies to eat some or all of the tariffs because they know how tough it difficult it be to pass on the price increases to consumers without losing sales.
“Which will harm profits.”
Selling prices: In terms of services, “competition limited the pass-through of higher costs to selling price,” the report said.
“The March survey also saw a modest acceleration in services selling price inflation, albeit to a level that was historically subdued as firms reported the need to offer competitive prices in a weak-demand environment,” the report said.
“Thankfully, from the Federal Reserve’s perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits.”
This further confirmed that tariffs are a tax on gross profits of companies, and whether or not they’re able to pass some of them on to their customers depends on market dynamics. Last time, in the 2018-round of tariffs, they were overall not able to pass them on, though they tried. Higher prices can cause sales to plunge, which causes those higher prices to get rolled back.
“The resulting combined increase in prices levied [selling prices] by companies across both sectors was the second largest seen over the past six months – surpassed only by the rise seen in January – but remaining below the survey’s long-run average,” the report said.
The numbers: above 50 = growth, below 50 = decline.
The Flash US PMI Composite Output Index jumped to 53.5, a three-month high, up from 51.6 in February, a 10-month low, according to the preliminary reading today, which captures about 85% of the data.
The Flash US Services PMI Business Activity Index jumped to 54.3 (faster growth) from 51.0 in February (slower growth).
Flash US Manufacturing PMI fell to 49.8 (slight decline) from 52.7 in February (faster growth).
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The post Services Activity Jumps in March, Cost Pressures from Tariffs & Staffing Well Up appeared first on Energy News Beat.
