US Business Activity Stalls as Consumer Confidence Plunges Amidst Tariff Fears

The US economy is showing signs of strain as business activity nears a standstill, Reuters reports, citing data from S&P Global and the University of Michigan. This slowdown follows a period of optimism following President Donald Trump's election victory, with the latest figures signaling a shift in sentiment.

"The Trump business honeymoon is over, it seems," said Kyle Chapman, FX markets analyst at Ballinger Group.

The S&P Global Flash US Composite PMI Output Index, which measures activity in both the manufacturing and services sectors, fell to 50.4 in February. This marks a 17-month low and a significant drop from January's 52.7. A reading above 50 indicates expansion, while a reading below 50 signals contraction.

The decline was primarily driven by the services sector, which contracted for the first time since January 2023. Meanwhile, manufacturing activity rose to an eight-month high, attributed by S&P Global to businesses "front-running potential cost increases or supply shortages linked to tariffs."

Trump's recent imposition of tariffs on various goods, including steel, aluminum, and potentially automobiles, semiconductors, and pharmaceuticals, has created uncertainty and raised concerns among businesses. Coupled with significant budget cuts and layoffs within the federal government, these policies are dampening economic prospects.

"Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers."

The decline in business activity is reflected in a sharp drop in consumer sentiment. The University of Michigan's Consumer Sentiment Index fell to a 15-month low of 64.7 in February, down from 71.7 in January. This coincides with a surge in consumer inflation expectations, with 12-month expectations rising to 4.3%, the highest level since November 2023.

The Federal Reserve, which paused its easing cycle in January after cutting interest rates by 100 basis points since September, is closely monitoring the situation. Minutes from the central bank's January meeting revealed concerns about Trump's initial policy proposals and their potential impact on inflation.

"You can bet that Chairman Powell and company will take note of that and that this further seals the case for the Fed remaining on hold for a while," said Stephen Stanley, chief US economist at Santander US Capital Markets, to Reuters. "The question is whether President Trump and the administration are paying attention to the souring of consumer moods due to the threat of tariffs."

Despite the overall economic slowdown, financial markets appear more concerned about a weakening economy than resurgent inflation. Futures contracts suggest a greater likelihood of two interest rate cuts this year, rather than just one.