But “competition limited the pass-through of higher costs to selling price … which will harm profits.”
By Wolf Richter for WOLF STREET.
Overall economic growth accelerated in March from February, driven by a sharp acceleration in services activity, which bounced off the 15-month low in February – with “companies reporting improved new business inflows amid some signs of strengthening customer demand and better weather compared to earlier in the year.”
Businesses reported that the acceleration in services comes “after adverse weather conditions had dampened activity across many states in January and February.”
Manufacturing pulled back in March from the spike in February, which had been the largest increase in output since May 2022, according to the “flash” composite Purchasing Managers’ Index by S&P Global today.
“Factories reported fewer instances of output having been buoyed by the front-running of tariffs, and new orders growth came close to stalling in the goods-producing sector. Input buying in the sector also fell back into decline,” the report said.
“However, export sales showed the smallest decline for nine months thanks to rising orders in particular from Canada, Germany and other EU countries, hinting at some further efforts to fulfil orders ahead of tariff implementation,” the report said.
Employment rose “slightly” in March from February, led by renewed hiring in services, while manufacturers cut headcount for the first time since October.
Indicative of 1.5% Q1 real GDP growth.
The services and manufacturing survey data are “indicative of the economy growing at an annualized 1.9% rate in March and just 1.5% over the quarter as a whole, pointing to a slowing of GDP growth compared to the end of 2024,” when real GDP grew by 2.3%.
So slower growth than in Q4, and slower than the 15-year average of 2%, and a tad slower than Q1 2024 (1.6%), but it would be far better than the recession everyone has been clamoring about.
“Competition limited the pass-through of higher costs to selling price.”
Input prices – cost for companies, including staffing costs – “accelerated sharply, especially in manufacturing, to a near two-year high, often attributed to the impact of tariff policies,” the report said.
“Cost pressures intensified across the economy in March. Across both goods and services, input costs increased at the sharpest rate for 23 months, surging especially in manufacturing (where the rate of inflation hit a 31-month high) but also picking up further pace (to an 18-month high) in the service sector.”
“Higher costs were first and foremost attributed to tariffs, though increased staffing costs were also widely reported,” the report said.
“Higher costs fed through to a steeper rise in manufacturing selling prices, which rose in March at the sharpest rate for 25 months.”
Many of these manufacturers’ customer are not retail customers, where measures such as CPI track inflation, but other companies, including construction companies, companies assembling the components or materials into finished goods, etc. And there often is another layer, such as retailers, between them and consumers. And passing price increases on through that chain is very difficult. Big retailers – from Walmart and Target on down – are currently in tough negotiations with their foreign supplies to eat some or all of the tariffs because they know how tough it difficult it be to pass on the price increases to consumers without losing sales.
“Which will harm profits.”
Selling prices: In terms of services, “competition limited the pass-through of higher costs to selling price,” the report said.
“The March survey also saw a modest acceleration in services selling price inflation, albeit to a level that was historically subdued as firms reported the need to offer competitive prices in a weak-demand environment,” the report said.
“Thankfully, from the Federal Reserve’s perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits.”
This further confirmed that tariffs are a tax on gross profits of companies, and whether or not they’re able to pass some of them on to their customers depends on market dynamics. Last time, in the 2018-round of tariffs, they were overall not able to pass them on, though they tried. Higher prices can cause sales to plunge, which causes those higher prices to get rolled back.
“The resulting combined increase in prices levied [selling prices] by companies across both sectors was the second largest seen over the past six months – surpassed only by the rise seen in January – but remaining below the survey’s long-run average,” the report said.
The numbers: above 50 = growth, below 50 = decline.
The Flash US PMI Composite Output Index jumped to 53.5, a three-month high, up from 51.6 in February, a 10-month low, according to the preliminary reading today, which captures about 85% of the data.
The Flash US Services PMI Business Activity Index jumped to 54.3 (faster growth) from 51.0 in February (slower growth).
Flash US Manufacturing PMI fell to 49.8 (slight decline) from 52.7 in February (faster growth).
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As always, awesome analysis.
Your readers don’t normally call you out, but I will on the tariff issue. You state: “ This further confirmed that tariffs are a tax on gross profits of companies, and whether or not they’re able to pass some of them on to their customers depends on market dynamics. Last time, in the 2018-round of tariffs, they were overall not able to pass them on, though they tried” This isn’t even Economics 101, it’s more like first grade level economics. If costs go up for a company, they normally pass the costs on to the consumer. Are there some exceptions? Sure – but they are exceptions and they are RARE. Companies are not going to eat billions of dollars in added cost, and just say ‘ Oh well, that’s business.’ No, they will raise prices. To say otherwise is similar to the Fed saying that inflation is transitory.
“This isn’t even Economics 101, it’s more like first grade level economics. If costs go up for a company, they normally pass the costs on to the consumer.”
Ignorant BS propaganda proven wrong by the facts:
Almost as if you already had those graphs ready to go… Hmmm.
Wolf the Prophetic guard against ‘Ignorant BS’.
I first published them in my articles here. All you have to do is read my articles.
Another factor in businesses being able to eat the cost of tariffs, is the current inflation rate?
True. But believing in a repeat of history is also why the Fed believed that inflation would be transitory.
History may be the best predictor of the future but it is by no means guaranteed. There are always new factors that can make for different outcomes.
And you have only one historical data point. The Fed had many.
Your articles get floated around as counter argument/narrative material around the web. I suspect you’re going to start seeing professional naysayers flooding your comments.
I’m already seeing them in large numbers — it’s worse than the anti-EV BS trolls were at the peak a few years ago (big-oil funded?). I block most of them because it’s just copy-and-paste BS what they say, and they’re just trying to “flood the zone,” and a waste of time for me to deal with. I single out a few that I then whack over the head with data, like this “Lawrence” here who just showed up for the first time in the comments to copy-and-paste his BS.
The reality is that Fed Chair Powell said last week that every Fed forecaster thinks that tariffs are inflationary.
Wolf – first time poster, here. Started following you a few months ago after I became part of your unemployed statistics. The wealth of knowledge you share is incredible – I am humbled by what I have learned and intend to give back once I get back on the horse, so to speak!
Lawrence, I would be curious to know the context on which you are basing your opinion. The last company I worked for was largely B2B2B/C and, in my opinion, part of an oligopoly. Whether due to tariffs or COVID-induced supplier price hikes, prices were indeed passed through to distributors (our direct customers) in the form of price increases or surcharges. However, I do not know whether these distributors were able to pass this cost along to their customers. Without giving away too much, the products made by this company were not something an end-user would ever buy directly but rather an infrastructure-related good used regularly by the average consumer.
We had a weather slow down and now that’s over. Costco is busier than ever.
Oh boy, now I’m in trouble, I disagree with my favorite disseminator of great economic information.
One thing that Wolf’s boxes do not accurately represent is the fact that the tariffs were not stopped at the right hand side of his boxes. The tariffs may not have had an immediate effect, but margins recovered for the companies after covid and those higher costs were passed on to consumers.
Currency inflation hit hard soon after the tariffs were fully implemented and the government paid farmers an estimated $23 billion in higher subsidies (think increased money supply) when the sales of their products were retaliated against.
I can make a pretty good case that tariff caused inflation takes time to work its way into the numbers. None of these events exist in a vacuum.
I’ll put my asbestos suit on now… ;-)
We know EXACTLY where the explosion of inflation came from in 2021, and we documented it in great detail back then right here with numerous articles, and it started with USED VEHICLES at the very beginning of 2021; it had zero to do with tariffs, because used vehicles are not even imported. People got thousands of dollars of free money, and they went out and blew it, and price suddenly didn’t matter. I called it back then the “inflationary mindset.” It started with used vehicles. But then the crazy demand spread to other goods, which was when supply chains collapsed, while China was in lockdown. I documented all this here with lots of articles at the time. To suggest that the price spike had something to do with the 2018 tariffs is revisionist bullshit. People already forgot about the pandemic, the effects of the free money, the supply chain lock-up, and the lockdown in China? This site is full of articles documenting these issues back then.
Wolf, I’m very intrigued by this idea of countries/regions repatriating more and more of their own production, particularly through automation (might even be a good offset against potential job losses coming from AI).
Putting aside the idea that a major move to build up manufacturing might have varying challenges in an uncertain tariff/political environment, let’s say that everybody went all hands on deck and full steam ahead with building new factories domestically around the world.
Would love to see some analysis around potential bottlenecks and timelines…
For instance, for the companies that are providing the automation for new factories, how quickly could they ramp up from whatever they’re at now? Could they double or triple or quadruple the machines there are used in new manufacturing facility within one to three years?
How industry specific are these automation enabling companies? Could a company that specializes in helping to build auto plants quickly pivot to providing machines for building domestic auto parts domestically? Maybe… Could they move quickly to building automation tools for washers and dryer‘s? Circular saws, hammers, etc.? Shooting from the hip here but hopefully you get the idea.
I recently saw an article about French restarting domestic production of gun powder… after just over $100 million in investment, they were hoping to start off with about 2/3 capacity, and then fully ramp up to a level that would only be about 1/30 the gun powder production of Russia.
I don’t mean that you should be focusing on military aspects, but it’s just one example of how there are limits to what even a determined base of support can do in a restricted period of time.
Would love to see you game out some possible scenarios for how fast manufacturing could actually increase domestically and/or around the world if everybody were to lean away from global supply chains at roughly the same time.
Best regards,
JDB
Planning, buying the property, building the plant, equipping a factory, and ramping up mass production takes several years at least. Nothing happens overnight in manufacturing.
Agree on the slowness of new manufacturing capacity coming online.
Which is why I’m really struggling to buy into the benefits of tariffs when it comes to bringing jobs back domestically – and I totally get that there may be a lot to be said for “better late than never”.
Interestingly, I was just researching this topic and apparently Siemens is one of the major industrial automation providers. Doesn’t look as though they’re buying into the hope of surging manufacturing capacity in the foreseeable future, though, as they just laid off thousands of people from that segment last week.
“Siemens will cut 5,600 jobs at its Digital Industries business, the engineering company said on Tuesday, in the latest blow for German industry shaken by weak demand at home and abroad.”
Siemens: China, a big customer, or was! And on top of that, US tariffs are not good for German companies importing their stuff to the US.
But in the US, Siemens is investing in new factories. Just on March 6: “This week, Siemens is unveiling two state-of-the-art manufacturing facilities for electrical products in Fort Worth, Texas, and Pomona, California. The $285 million investment is expected to create over 900 skilled manufacturing jobs.”
It has been doing that in the US for a few years — I mentioned some of those projects a year or two ago in one of my factory construction boom articles — while cutting its workforce elsewhere.
Solid points, but I think we may be talking a little bit of apples and oranges here, at least partly due to a lack of clarity on my part.
I believe you are talking about Siemens opening up new factories to create specific products in the US.
What I was referring to, however, were job cuts in Siemen’s business segment that actually provides automation solutions for other companies that are opening new factories.
As I interpret it, if they saw a coming wave of new factories in need of automation solutions, it seems like that would be the last segment where they would cut jobs.
Honestly, I’m surprised. Feels like there is a pretty strong inclination in Europe to become more self-sufficient as quickly as possible, and tariffs definitely shouldn’t be an issue there.
“Selling prices: In terms of services, “competition limited the pass-through of higher costs to selling price,” the report said.”
Crony end stage capitalism doesn’t have any competition.
Wolf, very educational, thank you. I think that we’ve been in Stagflation for years. Tariffs are a complicated topic and of course the politicians and the media are prone to oversimplification and misinformation. I could argue that the inflationary effects of the Trump tariffs in 2018 were just delayed to 2021, but I won’t! But whatever the reasons, car and truck prices are just nuts. I’m keeping the 2006 Honda CR-V until I can buy a cheap but well made EV that’s made in China!
We know EXACTLY where the explosion of inflation came from in 2021, and we documented it in great detail back then right here with numerous articles, and it started with USED VEHICLES at the very beginning of 2021; it had zero to do with tariffs, because used vehicles are not even imported. People got thousands of dollars of free money, and they went out and blew it, and price suddenly didn’t matter. I called it back then the “inflationary mindset.” It started with used vehicles. But then the crazy demand spread to other goods, which was when supply chains collapsed, while China was in lockdown. I documented all this here with lots of articles at the time. To suggest that the price spike had something to do with the 2018 tariffs is revisionist bullshit. People already forgot about the pandemic, the effects of the free money, the supply chain lock-up, and the lockdown in China? This site is full of articles documenting these issues back then.
Wasn’t the Cares Act implemented in March, 2020 when everyone got a check for $1200?
There were three big wages of stimulus money.
Wave #2 ($600) came under Trump in Dec 2020 with checks going out in late December 2020 through February 2021.
Wave #3 under Biden was the biggest one ($1,400) that was passed in March 2021 and went out mostly in March-May 2021.
And there was the huge wave of PPP loans, with loan applications being accepted through March 2021. That was more cash than the stimulus payments.
Then there were other huge stimulus measures signed into law in early 2021 by Biden, such as the Child Care Credit of $2,000 to $3,600 per child, etc. etc. It was stimulus after stimulus in 2021 during Biden’s first year.
Early 2021 started a huge flow of free money into all aspects of the economy. In addition, there were all the moratoriums on debt payments that allowed people to spend this money elsewhere.
In addition, interest rates were at 0%, and the Fed was doing lots of QE, and markets were roaring and throwing money in every direction.
And people used this money to buy goods, and prices no longer mattered, and then the supply chains collapsed, which caused shortages of everything, including the WOLF STREET mugs, which caused prices to spike further.
DID WE ALREADY FORGET? There is an endless number of my articles on WOLF STREET at the time about this stuff.
PPP loans are where the big stimulus money came from. I know people that got $1M+ in loans that they did not have to pay back and did not have to use on their business. They still have some of this money that is contributing to inflation as we speak.
Speaking of Wolf Street Mugs, I’ve got two of the large Pre-Covid mugs I got free for a $100 donations. It has become a rare collectors item as they are not made any more. I’ve put one on Ebay for a $500 starting price. Lets see how may offers I get and at what price.
If businesses can pass through the costs
of tariffs to the consumer, why weren’t they already charging the higher price ?
Profit margins will be squeezed and exporters will push down costs to maintain exports.
Exactly!!!
I don’t understand this idea that businesses haven’t been increasing prices.
It may not be happening in equal measures across all products and industries, but prices have definitely been increasing.
It’s called inflation, and there have been a plethora of articles on the topic on this very site.
You’re confusing general inflation in the economy with Sporkfed’s point: businesses charge the maximum they can while maintaining sales volume. Thus, businesses may not always be able to pass along increased costs, such as from tariffs, in the form of higher prices. Pricing power is a separate issue from inflation, though the issues may overlap if an inflationary environment gives businesses leeway to increase prices more than they otherwise could.
When you confuse the pricing power of businesses that sell goods (a small subset of all businesses), and overall inflation in the economy, you’re likely to misunderstand the economic data. As many articles on this site have detailed about inflation, and even Wolf’s comment above with the graphs indicates, inflation is not really present in goods at this point. Inflation is in services. To say businesses have been increasing prices, doesn’t distinguish between types of businesses. Sellers of goods, which are what tariffs apply to, already have limited pricing power as reflected in the graphs above and may need to to take some or all of the cost of tariffs as a hit to their profit margins if they want to maintain sales in this environment. That’s how I read Sporkfed’s and Wolf’s comments anyway.
I think you’re more focused one durable goods than I am, which is very heavily weighted towards the auto sector.
I’m talking about the millions of things that can be bought retail, as well as all the little components that come from some other place and have final assembly in the United States.
I’m no expert, but I believe auto insurance falls under services. That has skyrocketed, as repair costs have increased.
Can’t recall which category, but in another recent article of Wolf’s getting under the skin of CPI, there was a major category that had a monthly increase that wiped out the previous six months declines.
People want economics to be simple. It’s not, which is why I bailed after taking a couple 300 level classes – it was ridiculous how they would try to project for a broad range of unknowns, any one of which could be wrong.
By the way, I think you are mistaken here:
“…businesses charge the maximum they can while maintaining sales volume.”
Businesses generally try to maximize profits over some period of time. Auto manufacturers like Ford are a prime example – they could have kept volumes up, but decided they didn’t want to deal with cars so they went with the higher margins on trucks and SUVs and shut down their small and midsize car divisions.
We didn’t have the massive immigration when trump passed those tariffs. Immigration has exploded in recent years and has caused demand to explode in both products and services. Therefore you may be wrong and companies just “may” be able to pass these tariffs onto consumers given their insatiable demand. Your charts have shown nothing but stubborn and consistent increases in consumer spending since this immigration boom started! We will wait and see if you’re right or wrong, only time will tell. I’m not convinced you have this one nailed as you think you do. Let’s wait and see…
How are automakers going to pass on the tariffs??? They have to CUT prices right now to sell what they built. That’s why Ford is crying about the tariffs — it knows it has to eat 100% of any tariffs. How are homebuilders going to raise prices? They have inventory for sale out the wazoo and cannot sell enough already, and they’re piling on incentives and price cuts and mortgage-rate buydowns to move their inventory. How is Walmart going to increase prices without causing its sales to drop? It already warned of slower growth in 2025. And it cut a bunch of prices already. After all these price hikes over the past few years, companies have had to cut prices on manufactured goods to keep sales going. This is not an environment for big price increases. Surely they will try, and when sales drop off, they’ll cut those prices again. That’s what happened last time.
It’s very tough to increase prices right now. But we know one thing: their profit margins are going to shrink as they eat some or all of those tariffs. Those profit margins have become historically fat, and they have room to shrink. But that’s why COMPANIES hate tariffs so much. If they could just pass them on, they wouldn’t mind; their revenues would go up, that’s a good thing for Wall Street, and their profit margins would stay about the same. But that’s not how they see it. They hate tariffs because they figure that they have to eat them.
There is no telling how this will turn out. But one thing won’t happen: an easy pass-through to consumers of the tariffs.
My wife and I invested in some home gym equipment during the COVID lockdown. One company we bought from manufactures in China and sends me constant advertising now. I’ve noticed over the last two months that the sticker price for their equipment has gone up between $100-$300 (about 10%-15%), but the sales price is the same as the pre-tariff price. They are creating the illusion of greater savings for their consumers to drum up business, but so far they are eating the entire cost of the tariffs.