As Tariff Anxiety Eases, Business Activity and Sentiment Improve in the U.S

U.S. business activity showed signs of recovery in May, with output and future expectations improving as trade-related concerns temporarily subsided, despite ongoing inflationary pressures driven by tariffs.

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According to S&P Global data released Thursday, the flash composite index of output climbed 1.5 points to 52.1 in May. This rebound follows a dip in April when the index hit its lowest level since 2023. The index readings above 50 signal economic expansion, and the rise was supported by growth across both the manufacturing and services sectors.

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Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that confidence among businesses strengthened this month after April’s downturn. He attributed the improved outlook to a temporary halt on tariff increases, which eased some of the anxiety around trade policy. “Business confidence has improved in May from the worrying slump seen in April, with gloom about prospects for the year ahead lifting somewhat thanks largely to the pause on higher rate tariffs,’’ Williamson stated.

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While the uptick in sentiment and activity offers a positive signal, companies are still navigating a challenging cost environment. Firms have been more successful in transferring the increased costs from tariffs on imported goods and raw materials to customers. As a result, a composite gauge measuring the prices companies charge for goods and services rose for the third consecutive month, reaching its highest level since August 2022.

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The rise in prices comes amid growing concerns about supply shortages. These worries have prompted many businesses, especially manufacturers, to stock up on materials and components. In fact, the index tracking inventories of inputs surged to its highest level since the survey began in 2007. This behavior reflects a broader strategy among firms to get ahead of potential supply disruptions or further tariff increases once the current 90-day pause ends in July.

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“At least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues, most notably the potential for future tariff hikes after the 90-day pause lapses in July,’’ Williamson explained.

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Manufacturing showed stronger momentum, with the purchasing managers index (PMI) for the sector rising to 52.3—its highest in three months. This increase was driven largely by the sharpest gain in new orders in over a year, signaling improved demand. Output expectations among manufacturers also improved, reaching their highest level since February.

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Despite the encouraging data, manufacturers are still facing headwinds. Export orders fell for the second straight month, and employment in the sector also declined, suggesting that businesses are still cautious about longer-term prospects. The drop in export demand points to ongoing global uncertainty and weaker international demand, likely exacerbated by geopolitical tensions and trade disputes.

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The services sector, which accounts for a large share of the U.S. economy, also saw an improvement in activity during May. This rebound was primarily due to stronger domestic demand, with firms reporting firmer levels of new business. However, international demand was less robust. Export orders for service providers saw their steepest decline since the height of the COVID-19 lockdowns in 2020, underscoring continued weakness in foreign markets.

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While the improvement in business conditions is a positive development, it also complicates the outlook for inflation and interest rates. Rising input and output prices signal that inflationary pressures remain elevated. If these pricing trends persist, the Federal Reserve may be forced to weigh inflation control more heavily in its policy decisions, potentially limiting its ability to support growth with lower rates.

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Looking ahead, the fate of U.S. business sentiment may hinge on how trade policy evolves after July. If the temporary tariff pause is not extended, firms could once again face steeper costs and heightened uncertainty. The possibility of renewed trade tensions may lead businesses to continue hoarding supplies or curtail investment, potentially reversing some of the gains seen in May.

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In sum, U.S. business activity is showing modest signs of recovery as companies adapt to a changing trade and pricing environment. While demand is improving and confidence has rebounded slightly, persistent inflationary pressures and weak export markets continue to weigh on the broader outlook.

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