S&P Global Services PMI: A Warning Signal for Stagflation in the Services Sector

The latest S&P Global Services PMI data for the U.S. in April 2025 has delivered a stark warning: the services sector, the lifeblood of the American economy, is experiencing its slowest growth in 17 months, with the PMI reading just 50.8—a figure that barely exceeds the 50 threshold separating expansion from contraction. This decline, fueled by collapsing business confidence, waning domestic demand, and rising cost pressures, underscores a growing risk of stagflation—a toxic mix of stagnant growth and elevated inflation. For investors, this data is a call to reassess the resilience of consumer-facing sectors and the broader economic outlook.

Breaking Down the Numbers

The April PMI reading of 50.8 marks the weakest expansion since November 2023, falling short of economists’ expectations of 51.4. While services have now grown for 27 consecutive months, the data reveals significant weakening in key areas:

1. Activity and Hiring Stagnation: New business inflows and activity growth slowed sharply, with service providers noting that demand “came closer to stalling.” Hiring, a lagging indicator, nearly halted altogether, as firms cited reduced growth prospects and uncertainty.
2. Export Declines: Services exports contracted at the fastest rate since 2022, reflecting global demand headwinds and trade policy uncertainties.
3. Cost Pressures: Input costs rose due to higher import prices linked to tariffs, particularly impacting consumer-facing sectors like restaurants and hotels. Output price inflation accelerated, with firms passing costs to customers.
4. Confidence Collapse: Business confidence plummeted to its lowest level since August 2023, as firms expressed fears over supply shortages, cost pressures, and demand declines.

The divergence between services and manufacturing sectors is stark. While manufacturing grew modestly in April (PMI 50.7), the services sector—accounting for roughly 80% of U.S. GDP—is now teetering on the edge of stagnation.

The Stagflation Risk

Chris Williamson, Chief Business Economist at S&P Global, has warned that the services sector now faces “heightened risks of stalling growth and rising inflation.” This combination—stagflation—has historically been a nightmare for policymakers and investors alike. While manufacturing has received attention due to tariff-driven disruptions, the services sector’s slowdown poses a far broader threat.

The April data highlights two critical dynamics:
- Demand-Side Weakness: Federal spending cuts and uncertainty over trade policies have eroded consumer and business confidence.
- Supply-Side Pressures: Tariffs have driven up import costs, squeezing margins and forcing firms to raise prices.

This creates a vicious cycle: weaker demand meets higher prices, stifling growth while fueling inflation.

Implications for Markets and Investors

The PMI data raises urgent questions for investors:
- Consumer Discretionary Stocks: Companies reliant on discretionary spending—such as restaurants (e.g., DISH), hotels (MAR), and retailers (TGT)—face risks from slowing demand and rising costs.
- Inflation-Protected Assets: With price pressures intensifying, assets like Treasury Inflation-Protected Securities (TIPS) or commodities (e.g., gold) may gain favor.
- Defensive Sectors: Utilities (DUK) and healthcare (UNH) could outperform if stagnation deepens.

Conclusion: Navigating the Crosswinds

The April Services PMI underscores a critical turning point. With growth now at its weakest in over a year and stagflation risks rising, investors must prioritize resilience over growth. Key takeaways:

1. Sector Rotation: Shift capital toward sectors insulated from demand shocks and inflation, such as utilities and healthcare.
2. Monitor Policy Responses: Federal Reserve actions to curb inflation or fiscal measures to stabilize demand could alter the trajectory.
3. Beware of Stagflationary Feedback Loops: The PMI data suggests a dangerous cycle of weak demand and high inflation—a scenario where central banks face impossible trade-offs.

The services sector’s slowdown is not just an economic indicator; it is a harbinger of broader vulnerabilities. With May’s PMI release (scheduled for May 23, 2025) likely to provide further clarity, investors should brace for a challenging landscape—one where growth and inflation are increasingly at odds. As the data shows, the services sector’s decline is no minor blip. It is a warning that cannot be ignored.

In this environment, caution and diversification are paramount. The path forward hinges on whether policymakers can navigate these crosswinds—or if the services sector’s stagnation becomes the catalyst for a deeper slowdown.