U.S. Business Activity Slows Amid Price Pressures

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. business activity slowed to a ninth-month low in January amid rising price pressures, but firms reported boosting hiring, supporting the Federal Reserve’s cautious approach to cutting interest rates this year.

S&P Global reported that its flash U.S. Composite PMI Output Index, which tracks manufacturing and services sectors, declined to 52.4 in January, the lowest level since April, down from 55.4 in December. A reading above 50 indicates expansion in the private sector.

The services sector contributed to the drop in the PMI, while manufacturing expanded for the first time in seven months, fueled by hopes of “looser regulation, lower taxes, and heightened protectionism” under President Donald Trump’s administration. However, concerns remained that potential tariffs could disrupt supply chains and impact sales, or heighten inflation.

Fears that the U.S. central bank may adopt a more hawkish stance to manage inflation lingered. Trump, beginning his second term on Monday, has promised broad tariffs on imports and tax cuts, alongside a crackdown on illegal immigration.

Uncertainty over the economic impact of Trump’s trade and immigration policies prompted the Fed to reduce its projected rate cuts this year to only two, from the previous estimate of four made in September during its policy easing cycle.

Chris Williamson, chief business economist at S&P Global Market Intelligence, remarked, “Although output growth slowed slightly in January, sustained confidence suggests that this slowdown might be short-lived,” adding that the rise in hiring reflects an improved business outlook, with job creation at levels not seen for two and a half years.

The survey showed the new orders received by private businesses fell to 54.3 in January from 55.2 in December. Price increases intensified, with the gauge for average prices paid by businesses rising to 58.5 from 56.0 last month, attributed to higher supplier prices and wage hikes due to worker shortages.

Higher costs were passed on to consumers, with a measure of prices charged for goods and services increasing to 53.8 from 52.1 in December, indicating sustained inflation pressures across sectors. Progress on reducing inflation towards the Fed’s 2% target had virtually stalled, even as underlying price pressures eased somewhat in December.

Businesses showed eagerness to hire, but labor shortages constrained some firms. The employment measure rose to 53.7, the highest in 2.5 years, from 51.4 in December, marking the second consecutive monthly increase after four months of declines, primarily in service sectors.

The flash manufacturing PMI edged up to 50.1, its highest since June, from 49.4 in December. Economists had forecast a rise to 49.7. Conversely, flash services PMI dropped to 52.8 from 56.8, below expectations of 56.5.