Core Summary

  • The Iran war pushed up inflation and dragged service and manufacturing output growth to its weakest three-month level since early 2024, according to a purchasing managers' index (PMI) report released by S&P Global on Thursday.
  • Output prices rose at the fastest pace this month since mid-2022. Manufacturing goods price increasesclimbed to a 10-month high, while service sector selling price increases surged to a 45-month high. S&P Global said that although business activity has picked up slightly since March, it remains well below 2025 levels.
  • "The April PMI data broadly indicate that the economy is struggling to achieve annualized growth of more than 1%, with the vast services sector being the main drag," said Chris Williamson, chief business economist at S&P Global. "The Middle East war is the culprit," he said in the report.

Deeper Analysis

Williamson noted that in the services sector—the largest engine of economic growth—the war has curbed household and business spending across sub-sectors such as travel and finance, citing headwinds from "price spikes and expectations of higher borrowing costs."

Since the U.S. and Israel launched strikes on Iran on February 28, energy prices have risen sharply, with the global benchmarkBrent crude futuressoaring from $73 to $105 per barrel, a 44% increase.

Rising oil prices could further push up inflation, slow economic growth, and drive up unemployment.

In fact, S&P Global said employment grew only marginally this month, following a decline in March, marking the worst two-month stretch for jobs since late 2024.

S&P Global said that although manufacturing output grew at its fastest pace in four years due to a surge in new orders—the largest increase since May 2022—manufacturing employment fell for the first time in nine months.

"Customers restocking inventories, driven by concerns over supply tightness and war-induced price increases, boosted output and new order growth," S&P Global said.

One bright spot is that, according to analysts at BofA Securities, AI spending has boosted manufacturing production since January, ending a decline that lasted more than 30 months.

"We expect AI to continue providing positive momentum for manufacturing activity, as hyperscalers are projected to spend nearly 2.1% of GDP on capital expenditures this year," analysts said in a report on Thursday.

Additionally, S&P Global said expectations that tariffs will drive manufacturing reshoring and increased marketing spending pushed manufacturer confidence to its highest level since February 2025.

Meanwhile, "services sector confidence is particularly subdued," S&P Global said, citing concerns over war-induced inflation, supply bottlenecks, cost of living, and government policy.