Tariff Tensions Undercut Global Growth Hopes as U.S. Services Surge, Manufacturing Falters

Global business activity showed a mixed picture in March, according to preliminary Purchasing Managers’ Index (PMI) readings from S&P Global, with U.S. data taking center stage amid deepening tariff concerns. The U.S. Composite PMI climbed to 53.5 from 51.6 in February—a three-month high—driven entirely by a sharp rebound in the services sector. However, that strength masked growing fractures beneath the surface: manufacturing fell back into contraction, business confidence deteriorated, and inflationary pressures surged, largely fueled by tariffs and policy uncertainty under the new administration. The preliminary data, based on around 85% of survey responses, provides a timely snapshot of sentiment at a moment when global trade tensions are once again on the rise.

The March U.S. PMI data paints a bifurcated picture of the world’s largest economy. The Services PMI jumped to 54.3, reflecting a revival in activity after weather-related disruptions earlier in the quarter. But the Manufacturing Output Index plunged to 48.8 from 54.5, while the broader Manufacturing PMI dropped to 49.8, marking the first sector contraction since December. Much of the earlier strength in manufacturing had been attributed to front-loading ahead of anticipated tariffs; with that temporary lift fading, factory activity and new orders stalled. Export sales showed some resilience—likely driven by efforts to fulfill orders before tariffs take effect—but overall demand remained soft.

Inflation is back in focus, and tariffs are at the heart of the problem. Input price inflation surged to a 23-month high, led by a 31-month peak in manufacturing input costs. Higher staffing and logistics expenses added to the pressure. Despite efforts to pass along rising costs, weak demand—particularly in services—constrained pricing power. Still, manufacturers lifted selling prices at the fastest pace in over two years, while service sector prices ticked up modestly. The result: inflation is rising even as growth remains uneven, complicating the Federal Reserve’s calculus as it weighs rate cuts later this year.

Adding to the challenge, business confidence across the U.S. private sector deteriorated sharply. The Composite Future Output Index fell to its second-lowest level since late 2022, with service providers growing increasingly pessimistic amid uncertainty over federal spending cuts, trade policy, and regulation. While manufacturers were somewhat more upbeat—hoping for policy support through tax incentives and export-friendly rules—the overall sentiment trend was negative. Employment figures showed similar nuance: hiring resumed modestly, led by the services sector, but manufacturers cut jobs for the first time in five months. The backdrop is one of caution, not conviction.

Outside the U.S., a similar tone of fragility echoed through global PMIs. In the U.K., the Composite PMI rose to 52.0, a six-month high, driven by a recovery in consumer-facing services. Yet manufacturing remained in deep contraction, with the Manufacturing PMI slumping to 44.6. Export-led weakness—particularly tied to U.S. tariff fears—weighed heavily on factory output, while employment declined for the sixth consecutive month. Inflation pressures stayed elevated, especially in services due to wage growth, with April’s hike in National Insurance contributions likely to add further strain.

In the Eurozone, March data offered cautious optimism. The Composite PMI edged up to 50.4, thanks to a long-awaited rebound in manufacturing output, which posted its first expansion in two years. However, the broader Manufacturing PMI remained below the 50-mark at 48.7, indicating conditions are still challenging. Services growth continued but slowed, and new orders declined across both sectors. Input costs eased somewhat—particularly in services—but factory gate prices rose for the first time in seven months. While some manufacturers cited a demand bump tied to U.S. tariff fears, concerns about retaliation and disrupted trade flows continue to cloud the outlook. Business confidence fell for the second straight month.

Meanwhile, Japan’s economy showed fresh signs of strain. The au Jibun Bank Composite PMI fell to 48.5 from 52.0, as both services and manufacturing contracted. The Services PMI dropped to 49.5, and the Manufacturing PMI fell to 48.3—the latter driven by weak domestic demand and inflation concerns. Input costs, especially in services, rose at their fastest pace in over two years, while employment gains were modest and confidence slipped to its lowest since August 2020. Tariff-related trade anxiety added another layer of uncertainty, with firms increasingly cautious on hiring and investment.

Taken together, March’s PMI readings offer a sobering look at the global economy: services are carrying the load for now, but cracks are spreading. The resurgence of tariffs is driving inflation higher while blunting demand, especially in trade-sensitive manufacturing sectors. Business confidence is eroding under the weight of policy uncertainty, cost pressures, and geopolitical risk. While the U.S. remains a relative outperformer thanks to its services rebound, the global recovery is looking increasingly uneven—and increasingly vulnerable.