U.S. Business Activity Slows to 11-Month Low as Iran War Fuels Inflation Pressures

U.S. economic momentum weakened in March, with business activity growth slowing to its lowest level in nearly a year as companies grappled with rising costs and heightened uncertainty linked to the ongoing conflict in Iran.

According to S&P Global, the flash U.S. Composite PMI slipped to 51.4 from 51.9 in February. While the reading remains above the 50 threshold that signals expansion, it points to a clear loss of momentum in the world’s largest economy.

Services sector takes the biggest hit

The slowdown was led by the services sector, which remains the backbone of U.S. economic activity:

• Services PMI fell to 51.1 (11-month low)
• Manufacturing PMI rose slightly to 52.9 (two-month high)

This divergence highlights how consumer-facing industries are more exposed to:

• Rising living costs
• Weakening demand
• Geopolitical uncertainty

S&P Global noted that sectors such as travel, transport, and tourism are facing particular pressure due to a mix of affordability constraints and financial market volatility.

Inflation and uncertainty weigh on demand

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, described the current environment as an “unwelcome combination” of slower growth and rising inflation.

Businesses reported:

• Declining new orders
• Increased caution from consumers
• Higher operational costs

The impact of the Iran conflict is being felt through multiple channels:

• Surging energy prices
• Supply chain disruptions
• Elevated interest rate concerns

Companies are responding defensively by:

• Building precautionary inventories (“safety stocks”)
• Cutting hiring or reducing headcount
• Tightening cost controls

Growth outlook weakens

The latest PMI data suggest that U.S. economic growth is cooling significantly:

• Estimated GDP growth: ~1.0% annualized
• Q1 growth projection: ~1.3%

This marks a notable slowdown compared to earlier expectations of stronger expansion.

Oil shock driving inflation surge

A key driver behind the slowdown is the sharp rise in oil prices since the conflict began.

The effective disruption of shipping through the Strait of Hormuz, which carries around 20% of global oil supply, has:

• Pushed energy prices sharply higher
• Increased input costs for businesses
• Fed into broader inflation pressures

As a result:

• Input costs rose at the fastest pace in 10 months
• Selling prices saw their biggest increase since August 2022
• Supplier delivery times worsened to the highest level since October 2022

Fed faces a difficult dilemma

The Federal Reserve recently held interest rates steady, citing uncertainty around the economic impact of the conflict. However, the latest data complicates the outlook:

• Growth is slowing → argues for rate cuts
• Inflation is rising → argues for tighter policy

Markets, which previously expected rate cuts in 2026, are now beginning to consider the possibility that:

• The Fed may delay easing, or even
• Revisit rate hikes if inflation continues to accelerate

Bottom line

The U.S. economy is entering a more fragile phase characterized by:

• Slowing growth
• Persistent inflation pressures
• Elevated geopolitical risk

The combination raises the specter of stagflation-like conditions, where weak economic activity coincides with rising prices—posing a significant challenge for policymakers and investors alike.