U.S. Economy Shows Signs of Cooling as Tariffs Keep Pressuring Growth and Hiring

Overview: Fresh business surveys suggest the U.S. economy started the new year on a steadier—but slower—footing. Growth is still positive, yet it looks cooler than it was earlier. A big reason: many companies say tariffs continue to raise costs, squeeze demand, and complicate hiring decisions.

This rewritten report explains what the latest S&P Global survey data is signaling, why tariffs still matter even when the economy is expanding, and what it could mean for jobs, inflation, and interest rates in the months ahead. For reference, the original story appeared on MarketWatch.

1) What the New S&P Global Surveys Say

S&P Global’s early-year surveys point to an economy that’s still expanding, but not racing ahead. Two major “pulse checks” are important here:

• Services activity: The services index edged up to 52.8 from 52.7, hovering around an eight-month low. (Anything above 50 suggests growth, but this is still fairly mild growth.)
• Manufacturing activity: The manufacturing index was also close to flat at 51.9.

In plain language, businesses are saying: “We’re growing, but not by much.” That’s the “cooling” part—steady expansion, softer momentum, and fewer signs of a big surge in orders or hiring.

2) Why “Cooling” Doesn’t Mean “Collapsing”

It’s easy to hear “cooling” and think “recession.” But these survey readings are still above 50, which generally indicates expansion.

Think of it like jogging instead of sprinting. The economy can keep moving forward while slowing down. Cooling can also be normal after a period of strong growth—especially if businesses are dealing with higher costs, uncertain policies, and customers who are watching their budgets more carefully.

Key idea

Cooling often means companies are more cautious: they may delay new projects, add fewer workers, and negotiate harder on prices—without stopping activity altogether.

3) Tariffs: The Ongoing Weight on Growth and Hiring

One of the clearest messages from the surveys is that tariffs are still biting. Businesses report higher input costs and more friction in supply chains. Even if a company isn’t directly importing goods, tariffs can still affect it through:

• Higher supplier prices (suppliers pass costs along)
• Shifts in demand (customers buy less when prices rise)
• Uncertainty (companies hesitate when policies can change quickly)

According to the survey commentary summarized in the report, tariff pressures are showing up in both growth and hiring, especially outside “protected” areas of manufacturing.

Why tariffs can affect hiring decisions

When costs rise and demand feels “soft,” managers often choose to:

• Hold off on expanding payroll
• Use overtime instead of hiring
• Keep open roles unfilled longer
• Invest in efficiency (software, automation) instead of headcount

This doesn’t always cause mass layoffs—but it can lead to slower job creation, which gradually cools the economy.

4) Demand Improved a Bit, But Remains Soft

Another important note: the surveys indicated new orders rebounded modestly after a sharp drop near the end of last year. That sounds good, but there’s a catch—demand is still described as soft, particularly for services.

Services cover a massive part of the economy: retailers, banks, hospitals, hotels, professional services, and more. If service demand is only inching forward, it can limit how fast the overall economy grows.

What “soft demand” looks like in real life

• Consumers delay big purchases
• Businesses trim consulting, marketing, or travel budgets
• Customers ask for discounts or cheaper options
• Companies compete harder, which can cut profit margins

Even small changes in demand can matter because services are such a large share of U.S. economic activity.

5) Inflation, Affordability, and the “Cost Squeeze”

The report also highlights that inflation and affordability remain major concerns. When tariffs raise costs, and when firms also face other pressures (wages, shipping, materials), the result can be a cost squeeze.

Companies typically respond in a few ways:

• Pass costs to customers through higher prices
• Absorb costs, lowering profit margins
• Change suppliers or redesign products
• Reduce expenses (including slower hiring)

When many businesses do this at the same time, it can keep inflation “sticky” and make everyday life feel more expensive—especially for households that are already watching budgets closely.

How this connects to the Federal Reserve

The Federal Reserve pays close attention to both growth and inflation. If the economy cools while inflation remains uncomfortable, policymakers can face a tricky balancing act. Recent reporting has noted that inflation has stayed near the Fed’s target range but not fully settled, making future rate decisions heavily dependent on incoming data.

6) Manufacturing vs. Services: Two Different Stories

While both sectors showed expansion, the surveys suggest different pressures in each:

Services

Services activity is steady but subdued. If households and businesses buy fewer services—or trade down to cheaper choices—service companies tend to slow hiring first before making bigger changes.

Manufacturing

Manufacturing has its own challenges. Tariffs can raise the cost of parts and materials, and they can also reshape demand. The report indicates manufacturers outside certain “protected” areas may feel the pain more sharply.

Manufacturers often deal with long planning cycles. If they believe higher costs will last, they may delay expansion plans, cut capital spending, or look for new sourcing strategies—changes that can ripple through the supply chain.

7) The Hiring Picture: Modest Gains, Cautious Mood

The surveys point to modest employment gains, not a hiring boom. That matters because employment is one of the biggest engines of consumer spending: more jobs usually means more income, which often means more shopping, traveling, dining out, and home improvements.

When hiring is only modest, the economy can still grow, but it may grow more slowly. That “slow and steady” vibe matches the idea of cooling: forward progress, but less intensity.

What companies often do before hiring faster

• Wait to see if demand holds up for several months
• Raise hours for existing workers
• Use contractors for short-term needs
• Focus on productivity upgrades

Tariffs can amplify that caution, because they make costs harder to predict.

8) Business Confidence: Optimism, With Asterisks

Even with cooling growth, businesses in the surveys still expressed a level of optimism—hoping for better conditions ahead. The report notes companies are looking for support from factors like stronger sales, the possibility of lower interest rates, potential government spending, and strong stock-market conditions.

But there are “asterisks”: concerns about tariffs and political or policy uncertainty can weigh on confidence.

Why confidence matters

When leaders feel confident, they tend to invest, hire, and launch new products. When they don’t, they protect cash and move carefully. That psychological shift—optimism vs. caution—can change real-world outcomes.

9) What This Could Mean for Markets

Market reactions to mixed economic signals are often uneven. Slower growth can push investors to expect lower interest rates, which can help some stocks. But tariffs and stubborn cost pressures can worry investors about profits and inflation.

In other words, markets can react in two directions at once:

• Cooling growth may increase hopes for rate cuts
• Tariff-driven costs may increase worries about inflation and margins

This tug-of-war can lead to choppy trading and quick mood swings, especially when new data releases land.

10) The Bigger Picture: Growth Outlook vs. Tariff Drag

Zooming out, not everyone interprets tariffs the same way. Some research and surveys suggest the economy can adjust over time, while still acknowledging near-term pain—especially when retaliation, supply shifts, and higher costs are involved.

Recent coverage of economist outlooks has suggested forecasts can improve when other forces (investment, rate policy, fiscal policy) offset some of the tariff drag.

The key point for readers: tariffs don’t operate in isolation. They mix with interest rates, wages, technology investment, consumer confidence, and global growth. That’s why we can see an economy that’s still expanding, while companies still complain about trade-related costs.

11) What to Watch Next (Simple Checklist)

If you want to track whether cooling turns into something more serious—or whether growth re-accelerates—here’s a straightforward checklist:

• Services demand: Do new orders keep improving or slip again?
• Hiring trend: Do “modest gains” become stronger hiring, or does it stall?
• Tariff changes: Do policies tighten further, stay the same, or ease?
• Inflation pressure: Do costs cool enough for broad price relief?
• Interest-rate path: Does the Fed hold steady, cut, or signal concern?

These signals together help explain whether the economy is simply returning to a calmer pace—or heading into a rougher patch.

FAQs (Frequently Asked Questions)

FAQ 1: What does it mean when the S&P index is above 50?

In many business activity surveys, 50 is the dividing line. Above 50 usually indicates expansion, while below 50 often suggests contraction. The reported readings (services around 52.8 and manufacturing around 51.9) indicate growth, but not fast growth.

FAQ 2: If the economy is growing, why are tariffs still a problem?

Because tariffs can act like a continuing cost burden. They can raise prices for imported inputs, disrupt supply chains, and reduce demand if consumers face higher prices. Even during growth, these frictions can slow hiring and investment.

FAQ 3: Do tariffs always cause inflation?

Not always in a simple, direct way. Tariffs can raise costs in targeted categories, and some of that can show up in consumer prices. But the overall inflation impact depends on many factors—competition, currency moves, demand strength, and how much firms absorb rather than pass on.

FAQ 4: Why is soft demand in services such a big deal?

Services make up a very large part of the U.S. economy. When service demand is weak, businesses often slow hiring and spending, which can cool the whole economy even if manufacturing is stable.

FAQ 5: Does “cooling” mean a recession is coming?

No. Cooling can simply mean slower growth. A recession usually involves broader contraction and more consistent weakness. The survey readings described in the report still indicate expansion, just subdued momentum.

FAQ 6: What should regular people pay attention to?

Watch job trends, price changes, and interest-rate signals. If hiring stays modest and prices remain high, household budgets can feel tight. If inflation eases and borrowing costs drop, spending may improve.

Conclusion: A Slower Pace, With Tariffs Still in the Story

The latest S&P Global survey data paints a clear picture: the U.S. economy is still expanding, but it’s doing so more cautiously. Services and manufacturing remain above the growth line, yet momentum is limited. Meanwhile, many businesses say tariffs continue to create real-world drag—raising costs, softening demand, and keeping hiring plans conservative.

For now, this looks less like a sudden downturn and more like an economy settling into a calmer rhythm—one where policy choices, inflation trends, and consumer confidence will decide whether growth speeds up again or cools further.

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