US economic growth falters, goods prices spike higher in February flash data

February's flash Purchasing Managers' Index surveys showed a sharp slowdown in US business growth and rising goods prices.

Companies widely attributed the weaker expansion to uncertainty and disruption caused by recent policy initiatives; tariffs were cited as a key cause of higher prices in the manufacturing sector. However, stiff competition has limited selling price growth in the services economy, offsetting manufacturing price increases.

– Set email alerts for future PMI articles. – Read more PMI research on S&P Capital IQ Pro. – Full PMI data is available only via subscription. For more information or to express your interest, please contact your S&P Global relationship manager.

US growth falters

While the US was the fastest-growing major developed economy late last year and into January, according to Purchasing Managers' Index (PMI) data, expansion nearly stalled in February. The rate was weaker than that of Japan and the UK, and only marginally above the eurozone.

The US Composite Flash PMI Output Index, which measures month-over-month changes in output across both goods and services, fell to 50.4 from 52.7 in January, a 17-month low. The index stood at a near-three-year high of 55.4 in December 2024. While readings above 50.0 signal growth, the PMI for the US indicated a steep deceleration in economic growth over the past two months.

The comparable PMI Output Index for Japan has risen to 51.6 in February from 51.1, signaling accelerating growth. In Europe, the PMI output gauges continue to register near-stalled economies with the UK PMI edging down to 50.5 from 50.6 and the eurozone PMI holding at 50.2. The US now appears to have joined these European economies in the slow lane.

Historical comparisons suggest the US PMI now indicates just 0.6% annualized GDP growth in February. That compares with a 2.4% signal for the fourth quarter of 2024, with initial GDP estimates pointing to a similar 2.3% fourth-quarter expansion.

Service sector woes

The renewed US malaise centers on the service sector, which has contracted slightly. February marks the first time in more than two years that US services activity has contracted. Meanwhile, robust growth in services activity has been reported in Japan, though more sluggish rates were recorded in the eurozone and UK.

Anecdotal reports from companies on the PMI survey questionnaires indicate that US services firms widely blame lower sales and activity levels on uncertainty and instability surrounding new government policies, including federal spending cuts and tariff-related developments. Adverse weather also contributed in some cases, as it did in January, providing hope that some of the recent weakness may prove temporary.

Manufacturing sales, goods prices rise

The picture is different in manufacturing, where US manufacturers reported accelerating growth in February, marking the largest monthly rise in output for nearly a year. That contrasts sharply with the declining production recorded in the eurozone, Japan and the UK. However, the US flash PMI has strongly hinted at the front-running of sales and shipments due to growing tariff concerns, suggesting that at least some of the production increase in February may be short-lived.

Tariffs are also widely blamed for upward pressure on prices. US manufacturers reported their highest selling price inflation in two years as input costs surge to a rate not seen since November 2022. Of those US manufacturers reporting higher input prices, over one-third directly attribute the rise to tariffs, with other producers ascribing the rise more generally to the new government's policies.

Overall inflation cooling

From an inflation-fighting perspective, the service sector has been the most closely watched by policymakers, as it tends to align more closely with core inflation and wages. The flash US PMI actually brings good news on that front, with average prices charged for services barely rising in February, showing the smallest monthly rise since the COVID-19 pandemic. Services inflation remains somewhat elevated by historical standards in other major developed economies, most notably in the UK.

US services inflation cooling more than offset the two-year high increase in manufacturing selling prices, resulting in an overall moderating inflation picture for February. The resulting rate of inflation signaled by the surveys is consequently below the Federal Reserve's 2% target.

Profit warning

However, good news on services inflation is frequently linked to companies' offering discounts to attract sales. Input costs in the US services economy continue to rise at a rate well above the pre-pandemic average, with the rate of inflation even accelerating compared to January. The result is an effect that looks to squeeze profits. Our PMI-based indicator of S&P 500 earnings growth, derived from various survey subindexes tracking metrics relevant to profitability, including sales and margins, sunk in February to its lowest since December 2022.

Purchasing Managers' Index data is compiled by S&P Global for more than 40 economies worldwide. The monthly data is derived from surveys of senior executives at private sector companies and is available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and subindexes, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data is used by financial and corporate professionals to better understand where economies and markets are headed and to uncover opportunities.

Data and insights for this article were compiled by Chris Williamson, chief business economist for S&P Global Market Intelligence.