Dive Brief:
- The Iran war has fueled inflation and slowed output growth to the weakest three-month pace since the start of 2024, S&P Global said Thursday in a report on its purchasing managers index for services and manufacturing.
- Output prices this month rose at the fastest pace since mid-2022, S&P Global said. The increase in goods prices among manufacturers surged to a 10-month high, while the pace of gains in selling prices among service companies rocketed to a 45-month high. Business activity, while edging up since March, is far below the level in 2025, according to S&P Global.
- “The April PMI is broadly consistent with the economy struggling to manage annualized growth in excess of 1%, with the vast service sector acting as the principal drag,” S&P Global Chief Business Economist Chris Williamson said. “The war in the Middle East is squarely to blame,” he said in the report.
Dive Insight:
Among services companies — the biggest engine for economic growth — the war discouraged businesses and households from spending across a range of sub-sectors, including travel, tourism and financial services, Williamson said, noting headwinds from “surging prices and the prospect of higher borrowing costs.”
Energy prices have soared since the U.S. and Israel launched attacks on Iran on Feb. 28, with futures for Brent crude oil, the global benchmark, rocketing from $73 per barrel to $105 per barrel or 44%.
Higher oil prices threaten to further fuel inflation, slow economic growth and push up unemployment.
Indeed, employment edged up just slightly this month after falling in March, creating the grimmest two-month landscape for employment since late 2024, S&P Global said.
The headcount in manufacturing fell for the first time in nine months even as manufacturing output rose at the fastest pace in four years due to the biggest surge in new orders since May 2022, S&P Global said.
“Both output and new orders growth were boosted by client stock building amid concerns over supply availability and price hikes due to the ongoing war,” S&P Global said.
In one bright spot, spending on artificial intelligence has buoyed manufacturing production since January, ending a decline that lasted more than 30 months, according to analysts with Bank of America Securities.
“We expect AI to remain a positive tailwind for manufacturing activity moving forward, given hyperscalers expect to spend close to 2.1% of GDP on capital expenditures this year,” the analysts said in a report Thursday.
Also, hopes that tariffs will lead to re-shoring and increased spending on marketing lifted optimism among manufacturers to the highest level since February 2025, S&P Global said.
At the same time, “sentiment remained especially low in the services sector,” S&P Global said, noting concern about war-induced inflation, supply bottlenecks, the cost of living and government policy.
