- Manufacturers face highest input costs since July 2022
- Employment rises, driven by manufacturing order backlogs
- Existing home sales increase in May, trend remains weak
WASHINGTON, June 23 (Reuters) - U.S. business activity slowed marginally in June, though prices increased further amid President Donald Trump's aggressive tariffs on imported goods, suggesting that an acceleration in inflation was likely in the second half of the year.
The anticipated rise in inflation has resulted in the Federal Reserve pausing its interest rate cutting cycle, putting pressure on the housing market. The existing home sales pace in May was the lowest for the month since 2009 as higher mortgage rates sidelined potential buyers, other data showed on Monday.
The risks of higher inflation and tepid economic growth or stagflation have risen amid the uncertainty caused by the constantly shifting tariffs policy. An escalation in tensions in the Middle East after the United States joined in the conflict between Israel and Iran with air strikes on Tehran's nuclear facilities has added another layer of uncertainty.
"With tariff-induced price hikes already set to squeeze household spending power, higher gasoline prices would intensify the strain on consumer pockets, risking a more pronounced slowdown in the economy," said James Knightley, chief international economist at ING.
S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, slipped to 52.8 this month from 53.0 in May. A reading above 50 indicates expansion in the private sector.
The survey's flash manufacturing PMI was unchanged at 52.0. Economists polled by Reuters had forecast the manufacturing PMI easing to 51.0. S&P Global noted a slight rise in optimism among manufacturers "in part reflecting hopes of greater benefits from trade protectionism."
It, however, added that "companies generally remained less upbeat than prior to the inauguration of President Trump." Its flash services PMI dipped to 53.1 from 53.7 in May. Economists had forecast the services PMI falling to 53.0.
At face value, the PMIs suggested the economy continued to expand at a moderate pace at the end of the second quarter.
But so-called hard data on retail sales, homebuilding and the labor market have painted a picture of an economy that was softening because of tariffs.
That was reinforced by a separate report from the National Association of Realtors showing existing home sales increased 0.8% in May to a seasonally adjusted annual rate of 4.03 million units. Despite the rise, the sales pace was the slowest for any May since 2009 when the economy was at the tail end of the Great Recession, triggered by the bursting of the housing bubble.
Sales dropped 0.7% on a year-over-year basis in May. Other metrics were consistent with tepid demand. The 4.6 months supply of houses on the market was the highest in nearly nine years and a 1.3% price rise from a year ago was the smallest since 2023.
"Softer housing sector activity should be an early sign that underlying demand is weakening this year," said Veronica Clark, an economist at Citigroup.
SLOWING ORDER GROWTH
The S&P Global survey's measure of new orders received by businesses declined to 52.3 this month from 53.0 in May.
A measure of prices paid by businesses for inputs fell to 61.6 from 63.2 last month. But manufacturers faced higher input costs, with this price gauge jumping to 70.0. That was the highest reading since July 2022 and followed 64.6 in May.
Prices paid for inputs by services businesses remained elevated, with tariffs, higher financing, wage and fuel costs cited. The pace of increase, however, slowed amid competition.
Nearly two-thirds of manufacturers reporting higher input costs attributed these to tariffs while just over half of respondents linked increased selling prices to tariffs, S&P Global said.
That supports economists' expectations that inflation would surge from June following mostly benign consumer and producer price readings in recent months. Economists have argued that inflation has been slow to respond to Trump's sweeping import duties because businesses were still selling stock accumulated before the tariffs came into effect.
The survey's measure of prices charged by businesses for goods and services remained at lofty levels as manufacturers passed on the increased costs from tariffs to consumers. The prices charged gauge for manufacturers shot up to 64.5, the highest since July 2022, from 59.7 in May.
The strife in the Middle East could also help to fan inflation. Goldman Sachs has estimated Brent crude oil peaking at $110 per barrel if flows through the Strait of Hormuz were halved for a month and remained down by 10% for the next 11 months. Oil prices briefly touched a five-month high on Monday before erasing most gains as oil and gas transit continued on tankers from the Middle East.
Stocks on Wall Street were trading higher after Fed vice-chair Michelle Bowman said the central bank could resume rate cuts as soon as July. The dollar slipped against a basket of currencies. U.S. Treasury yields declined.
The Fed last week kept the U.S. central bank's benchmark overnight interest rate in the 4.25%-4.50% range, where it had been since December. Fed Chair Jerome Powell told reporters he expected "meaningful" inflation ahead.
S&P Global's employment picked up this month, mostly driven by manufacturing, where some factories are experiencing order backlogs. But some economists were skeptical of the improvement, noting the recent rise in the number of people collecting unemployment checks.
"The employment index has been a poor guide to payroll growth lately, raising questions about its accuracy," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "Other surveys ... all suggest that businesses are slowing employment growth."
Reporting by Lucia Mutikani; Editing by Andrea Ricci and Nick Zieminski
Source: Reuters