US March Composite PMI Unexpectedly Drops to 51.4; Manufacturing Expansion Accelerates, Services Growth Slows

US business activity growth slowed to an 11-month low in March, with diverging performance between the manufacturing and services sectors, coupled with a significant rebound in price pressures, reigniting market concerns over stagflation risks.

Preliminary data released by S&P Global on March 24 showed that the US March Composite PMI Output Index recorded 51.4, down from 51.9 in February and marking a new low since April last year. Services were the primary drag, with their Business Activity Index falling to 51.1, also an 11-month low; in contrast, the Manufacturing PMI rose to 52.4, a two-month high.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, pointed out that the March PMI data sent a combined signal of "slowing growth and rising inflation." He stated that additional uncertainty from Middle East conflicts and cost-of-living shocks have impacted demand, while soaring energy prices and supply chain delays are driving up business costs. Survey price indicators suggest consumer price inflation could accelerate back to around 4%, implying the US is facing "stagflation" risks.

Following the data release, market expectations for the Federal Reserve's policy path once again wavered. Weakness in services combined with the first decline in the labor market in over a year might strengthen rate-cut expectations; however, multi-month highs in both input costs and selling prices could constrain policy easing space. Analysts generally believe that the Fed will have to navigate a difficult balance between the risks of rising inflation and the risks of economic stalling.

Divergence in Manufacturing and Services Trends

The March PMI data showed a clear sectoral divergence pattern.

Manufacturing showed relative resilience: The Manufacturing PMI rose from 51.6 in February to 52.4, remaining in expansionary territory for the eighth consecutive month. The Output Index increased from 52.7 to 52.9, a two-month high; new order growth was the fastest in five months, and export orders stabilized after eight consecutive months of decline. Companies reported that the impact of tariffs on orders had weakened, and factories and their customers increased safety stock to lock in prices and ensure supply.

Services, however, faced significant pressure. The Services Business Activity Index fell from 51.7 to 51.1, the lowest since April last year. Weak growth in new business, an accelerating decline in export orders, and low consumer and business confidence collectively dampened services expansion. Respondents broadly attributed the slowdown to war-related uncertainty and the dampening effect of high interest rates on demand.

Price Pressures Resurface

Rising inflationary pressure emerged as one of the most closely watched signals from this data. Average input costs rose sharply in March, with the increase being the largest in ten months, primarily driven by soaring energy prices due to the war. Cost increases have been passed on to the sales side, with average selling prices seeing the largest increase since August 2022.

Manufacturing supplier delivery times lengthened to their most severe extent since October 2022, reflecting a renewed tightening of supply chains. Businesses widely linked price increases and supply tightness directly to the Middle East war, with shipping delays and raw material shortages driving up operating costs.

Initial Cooling Signals in the Labor Market

The employment index recorded its first decline in over a year. Although the decrease was mild, this marked the first contraction in employment numbers since February 2025, reflecting cautious hiring by companies amidst an uncertain economic environment.

Manufacturing employment saw only a marginal increase, the weakest in eight months; services reported a decline in staff numbers. Companies generally stated that they are seeking to cut expenses and control labor costs in response to cost pressures and demand uncertainty.

Diverging Future Expectations: Manufacturing Optimism vs. Services Caution

Business expectations for output over the next year showed significant divergence. The manufacturing expectations index rose to a 13-month high, with companies showing less concern about tariff impacts and anticipating stronger domestic demand for US manufactured goods.

Services expectations, however, fell to their weakest since October last year. Service providers broadly expressed concern about the impact of high energy prices on the cost of living, while also voicing worries about persistently high interest rates, financial market volatility, and travel disruptions.

Chris Williamson stated that the PMI data suggests an annualized GDP growth rate of only 1.0%, with overall economic expansion in the first quarter around 1.3%. He warned that the Fed will have to weigh the risks of rising inflation against the risk of the economy losing growth momentum, with the ultimate policy direction largely depending on the duration of the war and its impact on energy prices and global supply chains.