March Flash PMI Ticks Up, But These Data Points Raise Eyebrows
Margin concerns and inflation pressures remain headwinds as sentiment weakens.
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S&P Global has published its Flash March PMI for the U.S. and the composite reading of 54.3 indicates the economy gathered steam this month compared to February's 51 composite figure. To get a better indication of what happened, however, we need to go beyond that headline figure, and in doing so we find the manufacturing economy softened month over month, with the real upturn in the service sector.
A reminder that the service sector drives 80%-85% of GDP, which means the negative GDP figures put forth by the Atlanta Fed’s GDPNow model for the current quarter are likely suspect. Next week’s round of final March PMI data, including the GDP input figures from ISM, will likely hammer that home.
Uncertainty Remains
The pick-up in the overall economy was the good news but the decline we saw in manufacturing activity, as we suspected, points to companies pulling forward activity in February ahead of expected Trump tariffs. New order activity stalled, growing at only a marginal pace compared to February as the mood soured with company concerns increasing due to federal spending cuts, tariffs, and wider policy changes from the new administration.
This is not a surprise given the headlines or the high degree of uncertainty found in the February NFIB Small Business Optimism Index. And we are likely to see that uncertainty remain at lofty levels when we get the March data on April 8. This suggests the economy may start off Q2 2025 on a softer note, and that could be part of the reason why the Trump administration is now taking a more measured approach with April tariffs.
As we discussed in Monday' Daily Rundown video, the revelation that Trump's retaliatory tariffs will be more targeted and not be widespread is helping power the market higher Monday morning. However, the president will still be imposing tariffs and that means we could see companies on the receiving end instill tariffs on U.S. goods. As that plays out, we can’t ignore potential escalation risk. We doubt companies will be ignoring any of that as they sharpen their plan for the coming months. The odds of more conservative than expected guidance implied by consensus EPS growth prospects for the S&P 500 in Q2 2025 vs. Q1 2025 remain.
Cost Pressures Intensify
Adding to that, S&P’s Flash March data showed cost pressures intensified in both parts of the economy, chalked up to tariffs as well as staffing costs. That confirms our thinking that margins will be a focal point during the March-quarter earnings season and for June-quarter guidance. Output prices also moved higher in March, with those for the manufacturing economy rising at their strongest pace in 25 months, and also increasing for the service sector, although more modestly.
This continues the trend we’ve seen in recent months of inflation not getting back on track with the Fed’s target. Moreover, it’s before what’s to come in April. That combination leads us to continue questioning the 50-basis point in rate cuts telegraphed in last week’s fresh set of Fed economic projections.
In terms of March job creation, the Flash data showed only a marginal increase compared to February. Reading between the lines, the job creation that happened was likely more concentrated in the service sector than the manufacturing one.
