U.S. economy still struggling to adjust to tariffs, S&P finds, and there's one big danger sign

S&P Global's September surveys indicate a weakening U.S. economic expansion across both manufacturing and service sectors, with businesses struggling to adjust to tariff-related costs amidst softened customer demand. A critical concern highlighted is the record increase in unsold inventories, as companies absorb higher supply prices without fully passing them to consumers, leading to pressure on profit margins and slower hiring intentions. This data underscores the rationale behind recent Federal Reserve rate cuts, aiming to mitigate potential recessionary risks despite some business optimism regarding trade deals.

Analysis

S&P Global's September flash surveys reveal a tangible deceleration in the U.S. economic expansion, with both the services and manufacturing sectors reporting weakened growth. The services PMI declined to a three-month low of 53.9, while the manufacturing PMI fell to a two-month low of 52.0. Although these figures remain above the 50.0 expansion threshold, the slowing momentum is a key concern, directly attributed to businesses struggling with higher tariff-related costs and softening customer demand. A significant red flag is the record increase in factory inventories, indicating that unsold goods are accumulating due to a lack of demand. This inventory build-up, coupled with companies' inability to pass full cost increases to consumers, is compressing profit margins and has led to a notable slowdown in hiring intentions. While recent trade deals and Federal Reserve interest rate cuts have provided a degree of business optimism, the report's details on a deteriorating labor market underscore the rationale for the Fed's recent monetary easing as a measure to preempt a more severe downturn.

Key Decisions for Investors

• Investors should re-evaluate exposure to cyclical sectors, particularly manufacturing, as the record inventory build-up and margin pressure from tariffs signal a high risk of future production cuts and earnings disappointments.
• Closely monitor upcoming data on consumer demand and corporate profit margins, as these will be critical indicators to determine if the economic slowdown is deepening or if the Fed's intervention is stabilizing conditions.
• The divergence in market reaction, with the DJIA rising while the SPX fell, suggests investor uncertainty; this warrants a cautious and selective approach, favoring companies with strong balance sheets and pricing power that can better withstand margin compression.