US factory activity slips as materials costs rise on tariffs

US manufacturing slipped back into contraction territory this month, plagued by a tariff-related rise in materials costs, while the service sector outlook deteriorated.

The S&P Global flash March factory index dropped nearly 3 points to 49.8 from the highest level since mid-2022. Figures below 50 indicate contraction. Despite an improvement in output among service providers, due in part to stronger demand, sentiment about prospects over the coming year slid to the second-lowest since 2022.

Driven by a pickup in new business and better weather that propelled the services activity gauge to a three-month high, the flash March composite index increased 3 points to 52.4. At the same time, higher tariffs and federal spending cuts are generating more anxiety among service providers.

“A key concern over tariffs is the impact on inflation, with the March survey indicating a further sharp rise in costs as suppliers pass tariff-related price hikes on to US companies,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.

“Firms’ costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers,” Williamson said.

The report showed prices received by manufacturers rose at the fastest rate since February 2023. The composite index of prices paid increased at the fastest in nearly two years, including the sharpest rise for manufacturers since August 2022. Firms attribute cost pressures to higher labor costs as well.

A measure of factory production declined and a gauge of employment dropped for the first time since October. Orders growth neared stagnation as producers reported fewer instances of companies attempting to get ahead of higher duties on foreign imports.

Data for the survey were collected March 12-21.