U.S. economic growth accelerated in March, driven by a strong rebound in the services sector that more than offset a renewed decline in manufacturing, according to a report from S&P Global released Monday.
The composite measure of U.S. economic output, which measures combined manufacturing and services activity, rose to 53.5 from 51.6 in February, marking a three-month high.
The report showed that growth was primarily fueled by the services sector, where the business activity index increased to 54.3 from 51.0, also a three-month high. Companies reported improved new business inflows, partly due to strengthening demand and improved weather conditions. However, services exports continued to decline for a third consecutive month.
In contrast, manufacturing activity deteriorated sharply. The manufacturing output index fell to 48.8 from 54.5, while the broader manufacturing purchasing managers index—which includes new orders, employment changes, inventories, and delivery times, in addition to output—slipped to 49.8 from 52.7. Both readings represent three-month lows and signal the first contraction in the manufacturing sector since December. Factories reported fewer instances of tariff-related front-running that had temporarily boosted production earlier in the year, and new orders growth nearly stalled.
Despite the improvement in overall business activity, optimism about the future deteriorated. The report noted that confidence about the year ahead fell to its lowest level since October 2022, with companies citing concerns about customer demand, federal spending cuts, and tariff policies from the new administration.
“Near-term risks seem tilted to the downside,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “Growth is concentrated in the service sector as manufacturing fell back into decline after the front-running of tariffs had temporarily boosted factory output in the first two months of the year.”
Inflationary pressures also intensified, particularly in manufacturing where input prices rose at the sharpest rate in nearly two years. Higher costs were primarily attributed to tariffs, though increased staffing costs were also a factor. Selling prices for manufacturing climbed at the fastest rate in 25 months, while services price inflation accelerated modestly.
The report does not note that the Federal Reserve cut interest rates three times last year, which was followed by an uptick in inflation. The Fed believed the labor market was at risk of weakening and thought inflation had been tamed, both of which were proven wrong by subsequent economic data.
Employment increased slightly in March, led by renewed hiring in the services sector. However, manufacturing employment declined for the first time since last October, as manufacturers reported concerns over rising costs and a lack of demand.
The final data for March will be released on April 1 for manufacturing and April 3 for services and composite indicators.