The U.S. economy showed signs of cooling in March. Recent data indicates that business activity expansion slowed due to tensions in the Middle East and rising costs, while input costs surged significantly. The preliminary U.S. Composite Purchasing Managers' Index (PMI) for March fell by 0.5 points to 51.4, hitting its lowest level in nearly a year. Although the index remains above the 50-point threshold that separates expansion from contraction, indicating continued economic growth, the pace of expansion has clearly weakened. At the same time, the input prices index for businesses rose sharply by more than 3 points, reaching its highest level since May of last year.

Breaking down the components, the services sector was the primary factor dragging down overall performance. Growth in services activity slowed to its lowest rate in nearly a year, with input costs also climbing to their highest level since May of last year. In the manufacturing sector, raw material costs reached a seven-month high.

Uncertainty stemming from the Middle East conflict and rising living costs are dampening demand. Sectors related to travel, transportation, and tourism have been particularly affected. Additionally, volatility in financial markets, high interest rates, soaring energy prices, and supply chain delays have further reduced the resilience of both businesses and consumers.

Rising costs are also beginning to be passed through to end consumers. Survey data showed that businesses' selling prices recorded the largest increase in over three and a half years, indicating a resurgence of inflationary pressures.

On the employment front, business headcounts declined in March for the first time in a year, mainly reflecting reduced hiring in the services sector. New order growth was largely flat but remained below levels seen for most of last year.

However, there were some signs of stabilization in the manufacturing sector. Order growth was the strongest since last October, output accelerated slightly, and businesses' expectations for future output rose to their highest level in over a year.

Globally, spillover effects from the Middle East conflict are becoming more apparent. The eurozone's input cost indicator rose to a three-year high while economic growth neared stagnation. Business activity in India recorded its weakest growth since October 2022, with cost pressures approaching a four-year high. In Japan, raw material costs climbed to their highest level since April of last year, and the pace of economic expansion slowed simultaneously.