American businesses are swallowing the higher costs of tariffs rather than raising prices for consumers, new data suggests, providing relief on inflation and supporting the idea that the Federal Reserve’s focus should be on supporting the labor market.
The September purchasing managers’ indexes from S&P Global showed companies in manufacturing and services reported sharply higher input costs, which they primarily attributed to tariffs. But weak demand and fierce competition prevented most from raising prices, leading to the weakest goods inflation since January.
“Although tariffs were again cited as a driver of higher input costs across both manufacturing and services, the number of companies able to hike selling prices to pass these costs on to customers has fallen, hinting at squeezed margins but boding well for inflation to moderate,” said Chris Williamson, chief business economist at S&P Global Market Intelligence
The composite output index, which combines the services and manufacturing PMIs, fell to 53.6 in September from 54.6 in August. Any reading above 50 signals expansion, but this drop marks a second consecutive month of slowing growth. The services PMI declined to 53.9, slightly above expectations but down from its summer pace, while manufacturing eased to 52.0—above forecast yet off its recent highs. S&P Global estimates that the economy expanded at about a 2.2 percent annualized rate in the third quarter.
“Further robust growth of output in September rounds off the best quarter so far this year for U.S. businesses,” Williamson said. But he noted that “the monthly profile is one of growth having slowed from its recent peak back in July, and September saw companies also pull back on their hiring.”
Recent comments from Federal Reserve officials reflect similar views of the economy.
St. Louis Fed President Alberto Musalem, speaking Monday at a Brookings Institution event in Washington, D.C., said that the effects of tariffs “have been more muted than expected, suggesting that factors other than tariffs are contributing to above-target inflation.” He noted, however, that business contacts have said it can three to six months for prices to adjust to tariffs and that only four months have passed since the Trump administration’s tariffs were put in place.
“Business contacts report that producers of intermediate goods are fully passing on tariffs to their customers in the form of price increases and surcharges, while firms closer to the final consumer are less able to do so,” Musalem said.
Governor Stephen Miran, newly confirmed to the Fed board, said in speech to the Economic Club of New York Monday that economists and policy makers have over-estimated the inflationary effects of tariffs. He argued that “relatively small changes in some goods prices have led to what I view as unreasonable levels of concern.” Miran emphasized that tariff revenue could reduce the federal deficit by over $380 billion annually, creating what he called “a significant swing in the supply–demand balance for loanable funds” that would result in lower inflationary pressures.
Vice Chair for Supervision Michelle W. Bowman pointed to weakening employment as another factor cooling price pressures. Labor market conditions have deteriorated, hiring has slowed and unemployment has begun rising, she said Tuesday. Wage growth has slowed to “a pace consistent with 2 percent inflation, indicating that the labor market is no longer a source of inflation pressures,” she said.
Bowman said inflation excluding tariff effects has “continued to hover not far above our target.” With trade policy now more settled, she said, tariffs will likely have “only a small and short-lived effect on inflation going forward.”
The survey also revealed economic warning signs that suggest monetary policy is dampening demand and putting growth at risk. Factories reported a historically large buildup of unsold goods, export orders weakened, and hiring slowed in both the services and manufacturing sectors.
Still, business sentiment improved as companies hoped that recent Fed rate cuts would cushion the economic impact of trade policy uncertainty.
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