Flash February PMI Points to Major Red Flag on Trump Tariff Impact

Our view has been the February Flash PMI report from S&P Global would be revealing with what it says about the pace of the economy, inflation pressures and initial reactions by companies to Trump tariffs, as well as ones in response to those measures.

What we saw in the report that was released on Friday morning showed a pick-up in the manufacturing economy during February, but also a dramatic fall in the larger Service sector, which accounts for more than 85% of GDP.

By the numbers, from S&P Global:

The Flash U.S. Services PMI Business Activity Index came in at 49.7 for February, down from 52.9 in January, marking a 25-month low.

The Flash U.S. Manufacturing PMI rose modestly to 51.6 in February, from 51.2 in January.

The Flash U.S. Manufacturing Output Index rose to 53.8 up from January’s 51.8 figure, hitting an eight-month high.

What was more insightful was the commentary that accompanies those figures:

"U.S. business activity growth came close to stalling in February, according to flash PMI survey data, as a renewed fall in services output offset faster manufacturing growth. New order growth also weakened sharply and business expectations for the year ahead slumped amid growing concerns and uncertainty related to federal government policies. The upturn in manufacturing output was also in part linked to the front-running of tariffs, hinting at merely a temporary boost."

To be fair, the data behind these findings were collected during February 10 to February 20, which also saw several winter storms, but even so, the Flash Service PMI reading falling into contraction territory is going to catch some eyes on Wall Street, as will the decline in job creation in the Service sector. If we see the same in ISM’s upcoming February PMI reports, it will lead to GDP expectations for the current quarter moving meaningfully lower. That will stoke concerns over the economy especially as Trump talks more tariffs.

The same can be said for what S&P’s Flash findings showed for inflation:

"Service sector input cost inflation edged up to a four-month high, with companies citing tariff-related price hikes from suppliers alongside rising food prices and upward wage pressures. But it was manufacturing that saw the steepest increase in costs, with raw material prices showing the largest monthly gain since October 2022, with the increase overwhelmingly blamed by purchasing managers on tariffs and related supplier-driven price hikes."

This confirms the concerns that many had as Trump announced tariffs, a thought that was revisited in the Fed’s meeting minutes published on Wednesday — the impact of tariffs on inflation. One thought lurking in the back of our mind as we digest this data is, what if the Trump tariffs on Mexico and Canada had not been pushed out to early March?

On Thursday, we discussed several issues that were already flashing yellow lights for the market, and the Flash February findings are in that camp as well. At a minimum, the report will increase uncertainty in the market. Fortunately, we have our cash on hand and our inverse ETF positions that help insulate us from the volatility it will bring with it. The next level of support for the S&P 500 is near 6,011, just over 1% lower than current levels. After that, it’s near 5,942, about 2.2% lower.

Given that downside potential, we will continue to walk the cautious path near-term and intend to revisit levels for holdings we’d like to increase our exposure to as well as potential new candidates for the Portfolio. We will continue to re-evaluate our timing for unwinding Four-rated Trade Desk TTD shares.

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At the time of publication, TheStreet Pro Portfolio was long TTD.