WASHINGTON (Reuters) - U.S. business activity picked up in March, but growing fears over import tariffs and deep government spending cuts continued to weigh on sentiment and prospects for the rest of the year.

The survey from S&P Global on Monday also showed a measure of prices paid by businesses for inputs surging this month to the highest level in nearly two years, with increases in both manufacturing and services industries. Companies also appeared reluctant to raise headcount.

The improvement in activity will probably do little to assuage fears that the economy was staring at a period of very slow growth and high inflation. Consumer sentiment has also deteriorated as households worry about the future.

President Donald Trump has imposed a raft of tariffs on imported goods since returning to the White House, with some duties delayed until next month. The Trump administration has also embarked on an ambitious campaign to drastically cut government spending, firing thousands of public workers, though some have been ordered reinstated by courts.

"Business confidence in the outlook has also darkened ... largely caused by growing worries over negative impacts from recent policy initiatives from the new administration," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "Most widely cited were concerns about the impact of federal spending cuts and tariffs."

S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 53.5 this month from 51.6 in February. A reading above 50 indicates expansion in the private sector.

The survey was conducted between March 12-21. The services sector accounted for the rise in the PMI, partly attributed to a thaw in temperatures. Manufacturing slid back into contraction territory after two straight months of growth.

The PMI would suggest the economy was regaining speed after hitting a soft patch halfway through the first quarter, in part because of snow storms and freezing temperatures. But so-called hard data, including retail sales and the employment report, have hinted at cracks in the foundation of the economy.

Gross domestic product estimates for the first quarter are mostly below a 1.5% annualized rate. The economy grew at a 2.3% pace in the October-December quarter.

The Federal Reserve last week forecast the economy growing 1.7% this year, downgraded from the 2.1% it projected in December. The U.S. central bank estimated the Personal Consumption Expenditures (PCE) price index, excluding food and energy, increasing 2.8% this year, up from the previously estimated 2.5%. The so-called core PCE inflation is one of the price measures tracked by the Fed for its 2% target.

It held its benchmark overnight interest rate in the 4.25%-4.50% range, an acknowledgement of the uncertainty swirling around the economy.

PRICES SOAR

The S&P Global survey's business confidence measure dropped to the second lowest reading since 2022.

Its measure of prices paid by businesses for inputs jumped to 60.9, the highest reading since April 2023, from 58.4 in February. It was boosted by the manufacturing gauge, which soared to the highest level since August 2022, attributed to tariffs and rising staffing costs.

Manufacturers passed on the higher costs to consumers. Services businesses also faced expensive inputs, but their ability to raise prices for their products was limited by increased competition amid slowing demand.

A measure of prices charged by businesses for their goods and services rose to 53.6 from 52.3 last month.

"Thankfully, from the Fed's perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits," said Williamson.

The survey's measure of new orders received by businesses increased to 53.3 this month from 51.9 in February. Its measure of employment edged up to 50.6 from 49.4 in January.

The survey's flash manufacturing PMI dropped to 49.8 from 52.7 in February. Economists polled by Reuters had forecast the manufacturing PMI slipping to 51.7.

Its flash services PMI rose to 54.3 from 51.0 last month. Economists had forecast the services PMI falling to 50.8.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)