Jamie Spencer
U.S. business activity nearly stalled in February as mounting concerns over tariffs on imports and significant federal government spending cuts dampened economic optimism. According to S&P Global’s report on Friday, business activity reached a 17-month low, reflecting growing unease over President Donald Trump’s economic policies.
Decline in Business and Consumer Sentiment
After an initial surge in optimism following Trump’s election, business and consumer sentiment has sharply declined. S&P Global’s flash U.S. Composite PMI Output Index dropped to 50.4, the lowest since September 2023, signaling near-stagnation in the private sector. The services sector contracted for the first time since January 2023, attributed to fears over tariffs and supply chain disruptions.
“The Trump business honeymoon is over, it seems,” said Kyle Chapman, FX markets analyst at Ballinger Group.
Impact of Tariffs and Government Spending Cuts
Trump imposed a 10% tariff on Chinese imports and threatened 25% levies on imports from Mexico, Canada, and several other sectors including autos, semiconductors, and pharmaceuticals. These tariffs, combined with deep federal spending cuts, have created widespread uncertainty among businesses.
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted, “Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments.”
Inflation and Federal Reserve’s Response
Inflation expectations have surged, with S&P Global’s measure of prices paid by businesses for inputs increasing from 57.4 in January to 58.5 in February. Manufacturers attributed the rise to tariffs and supply-driven price hikes, which have been passed on to consumers, raising the cost of goods.
Meanwhile, the Federal Reserve paused its policy easing cycle in January after cutting interest rates by 100 basis points since September. However, concerns over inflationary pressures from tariffs may prompt the Fed to maintain its restrictive interest rate stance for the foreseeable future.
Broad Economic Impact and Housing Market Weakness
Economic indicators show broad deterioration. The University of Michigan’s consumer sentiment index fell to a 15-month low, with inflation expectations reaching their highest level since November 2023. Homebuilder sentiment also hit a five-month low, reflecting concerns over the cost of building materials due to tariffs.
In the housing market, sales of previously owned homes fell by 4.9% in January, attributed to high mortgage rates, elevated house prices, and increased costs of building materials.
Economic Outlook and Market Reaction
Wall Street reacted negatively, with stock markets declining and U.S. Treasury yields slipping. However, the dollar rose against a basket of currencies. Economists remain cautious about the future, with some suggesting that Trump’s tariff threats may be a strategic tool for trade negotiations.
Raymond James chief economist Eugenio Alemán stated, “Once fears about tariffs fade, inflation expectations will likely come down and allow the Fed to ease rates later this year.”
