Survey data released on Monday revealed that business activity in the United States experienced a notable slowdown in July, hitting a five-month low. The decline was primarily driven by decelerating growth in the service sector, which has been closely monitored for its impact on the overall economy. Despite this concerning development, some indicators, such as falling input prices and reduced hiring, may signal progress for the Federal Reserve in its battle against inflation.
US Business Activity Slows In July
The flash U.S. Composite PMI index, maintained by S&P Global, tracks both the manufacturing and service sectors. It recorded a reading of 52 in July, down from 53.2 in June. While the latest reading still indicates growth, it represents the sixth consecutive month of expansion and is dampened by softening conditions in the service sector. A reading above 50 indicates expansion.
Economists noted that the recent tepid survey data supports the evidence of ongoing growth in the U.S. economy as the third quarter commenced. However, the pace of growth appears to have slowed compared to the April-through-June period.
According to Chris Williamson, the chief business economist at S&P Global Market Intelligence, the rate of output growth across both manufacturing and services suggests that the GDP is expanding at an annualized quarterly rate of approximately 1.5% in the early stages of the third quarter. This is a decline from the 2% pace indicated by the survey during the second quarter.
The slowdown in US business activity may be seen as a positive sign by the Federal Reserve, as it seeks to curb inflationary pressures. In line with this objective, policymakers are expected to raise interest rates by a quarter percentage point on Wednesday, potentially marking the final increase of the current cycle.
Despite the overall growth in the economy, there remains a significant reliance on the service sector, as manufacturing continues to contract. The report highlighted a growing dependency on international demand, with new export orders for services reaching the highest levels since May 2022, thanks to a weakening U.S. dollar.
However, the services activity index experienced a decline, falling to 52.4 from 54.4 in June. This reading was below economists’ expectations of 54 in a Reuters poll.
On the other hand, the survey indicated a slight improvement in the manufacturing sector, with the manufacturing output index registering growth for the first time in two months, rising to 50.2 from a contracting rate of 46.9 in June. Despite the improvement, the broader manufacturing PMI index remains in contraction territory, recording a reading of 49 compared to 46.3 last month, but it surpassed economists’ forecast of 46.2.
The report showcased mixed signals regarding the Fed’s efforts to control inflation. Although both manufacturing and service sectors increased their workforce headcount in July, the overall rate of job creation hit a six-month low, implying a potential cooling in the job market’s resilience.
Input prices, a crucial factor in inflationary pressures, displayed diverging trends among industries. While total input prices softened to the lowest levels since October 2020, the service sector experienced its lowest cost pressures in over two-and-a-half years. On the contrary, inputs in the manufacturing sector rebounded, reaching a three-month high.
Furthermore, domestic demand remained subdued, as new orders weakened for the second consecutive month, reflecting potential challenges in stimulating consumer spending.
Chris Williamson highlighted a decline in optimism within the private sector, with the overall future outlook dropping to its lowest levels since December 2022. This darkening picture, combined with the slowdown in expansion in July, raises concerns about potential downside risks to output growth in the coming months and the lingering fear of a possible economic downturn before the year’s end.