US business activity rises; tariffs fuel inflation concerns
WASHINGTON (Reuters) -U.S. business activity picked up in July, but companies asked higher prices for goods and services, supporting economists' views that inflation will accelerate in the second half of the year mainly because of tariffs on imports.
Despite the increase in activity this month, the survey from S&P Global on Thursday also showed sentiment among businesses remained downbeat, which it said "primarily reflected broad-based concerns over tariffs and cuts to state funding following recent federal government policy changes."
Consumer prices increased by the most in five months in June, with solid rises in the costs of tariff-exposed goods like household furnishings and supplies, appliances, sporting goods and toys, signaling that President Donald Trump's broad import duties were starting to have an impact on inflation.
S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 54.6 this month, the highest level since December, from 52.9 in June. A reading above 50 indicates expansion in the private sector.
The improvement came from the services sector, where the flash PMI surged to 55.2 from 52.9 in June. Economists polled by Reuters had forecast the services PMI inching up to 53.0. The survey's flash manufacturing PMI dropped to 49.5, the first contraction since December, from 52.9 in June.
Manufacturing received a bump from front-loading of activity ahead of tariffs as well as from the protectionist nature of the duties. But S&P Global noted that "any protectionist benefits of import tariffs were often outweighed by concerns over higher prices and rising costs." Economists polled had forecast the manufacturing PMI easing to 52.7.
HIGHER PRICES
The survey's measure of prices paid by businesses for inputs edged up to 61.9 from 61.2 in June. The price gauge for services inputs jumped to 61.4 from 59.7 in June.
While the pace of price rises for manufacturing inputs slowed, nearly two-thirds of manufacturers in the survey reporting higher costs attributed those to tariffs.
The survey's measure of prices charged by businesses for goods and services ticked up to 58.6 from 58.1 in June. The prices charged gauge for services increased to 58.2 from 57.2 in June.
About 40% of service providers reporting higher selling prices explicitly mentioned tariffs, while just under half of their counterparts in manufacturing blamed the import duties.
The increase in business activity and elevated price gauges at face value argue against the Federal Reserve resuming interest rate cuts this month.
Trump is demanding the U.S. central bank reduce borrowing costs, citing among others the struggling housing market. The Fed is expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range, where it has been since December, when it meets later this month.
"The rise in selling prices for goods and services in July, which was one of the largest seen over the past three years, suggests that consumer price inflation will rise further above the Fed's 2% target in the coming months as these price hikes feed through to households," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The survey also suggested the labor market remained stable early in the third quarter, though factories shed jobs.
New orders received by businesses increased this month, though both goods and services exports declined. The weakness is likely because of trade tensions and the Trump administration's immigration crackdown. Data and anecdotal evidence have shown fewer tourists visiting this year.
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