Core Overview

  • S&P Global data released on Tuesday showed that U.S. business activity growth slowed to an 11-month low in March, mainly due to the Iran war pushing up prices and dampening new orders.
  • Service sector activity growth was the weakest in nearly a year, as companies raised average selling prices at the fastest pace since August 2022 to cope with rising input costs and surging energy prices. Manufacturers, however, saw growth in new orders and output as tariff concerns eased.
  • The S&P Global flash composite PMI fell 0.5 points to 51.4 in March, still above the 50 no-change threshold. Chris Williamson, chief business economist at S&P Global Market Intelligence, said in the report that the decline signals an "unfavorable combination of slowing growth and rising inflation following the outbreak of the Middle East war."

In-Depth Analysis

Williamson noted that although the Iran war broke out less than a month ago, it has already impacted businesses across multiple economic sectors. He said: "Travel, transport, and tourism-related issues, coupled with financial market tensions and affordability constraints, especially concerns over high interest rates, surging energy prices, and supply chain delays, are weighing on businesses." He added: "Companies report that the additional uncertainty and cost-of-living impact from the conflict have dampened demand."

Brent crude futures, the global benchmark, have surged about 50% over the past month, from $67 to $100 per barrel. During the same period, the average price of regular gasoline also rose 35%, according to data from the American Automobile Association (AAA).

Mark Zandi, chief economist at Moody's Analytics, said in a LinkedIn post on Tuesday: "The Iran conflict that erupted in late February has caused the largest disruption to global oil supply in history." He added: "As the prospect of a quick resolution fades, pressure on global financial markets is mounting, and recession risks are high and rising."

Zandi also noted: "Corporate bond spreads are widening due to concerns about companies' ability to repay debt. Lower-rated borrowers are finding it increasingly difficult to issue new debt." He warned that if oil shipments through the Strait of Hormuz remain disrupted, the Dallas Fed reports the U.S. economy could slow by 2.9 percentage points on an annualized basis in the second quarter. If oil prices do not retreat within the next two months, the U.S. will suffer "significant economic losses" due to rising inflation and slowing growth.

Williamson, citing S&P Global data, said the U.S. economy may grow at an annualized rate of only 1.3% in the first quarter. The data also shows consumer price inflation could rebound to around 4%, "suggesting a growing risk of the U.S. sliding into a stagflationary environment." Zandi said sustained higher energy prices would cause consumer spending and confidence to plummet, as consumers support nearly 70% of economic growth. He said: "The biggest blow is to consumers' purchasing power. If a larger share of wages goes to fueling cars and paying utility bills, spending on other items will decline."