Key Takeaways
- U.S. Composite PMI Output Index climbed to 53.6 in July, marking an eight-month high and signaling a robust start to the third quarter.
- The services sector drove the expansion, with the Services PMI jumping to 53.6, significantly outperforming the consensus estimate of 51.5.
- Manufacturing growth showed signs of cooling, as the Manufacturing PMI edged down to 53.8, missing analyst expectations of 54.4.
- Inflationary pressures intensified as selling prices rose at the fastest rate in nearly four years, driven by supply chain delays and rising input costs.
- Business confidence and hiring improved, with firms adding staff for the first time in three months and optimism reaching an eight-month peak.
U.S. business activity accelerated at the start of the third quarter, fueled by a significant rebound in the services sector. The S&P Global (SPGI) Flash U.S. Composite PMI rose to 53.6 in July from 51.9 in June, its highest level since last November. This growth suggests the U.S. economy is expanding at an annualized rate of approximately 2.0%, up from the 1.2% pace signaled in the second quarter.
The services sector was the primary engine of growth, with the Services Business Activity Index surging to 53.6 from 51.2 in the previous month. Analysts noted that consumer spending was likely bolstered by seasonal factors, including Independence Day celebrations and hospitality demand related to the FIFA World Cup. This surge in demand prompted service-oriented firms to increase their workforces for the first time since April.
In contrast, the manufacturing sector experienced a slight loss of momentum. The Manufacturing PMI declined to 53.8 from 53.9 in June, falling short of the 54.4 forecast. While the sector remains in expansion territory (above 50.0), factories reported the weakest gains in output and new orders since March. Market participants are closely watching this divergence, as manufacturing has historically served as a leading indicator for broader economic shifts.
Despite the headline growth, the report highlighted a concerning "intensification" of price pressures. Input cost inflation reached a 14-month high, while selling price inflation approached a four-year peak. S&P Global Market Intelligence Chief Business Economist Chris Williamson warned that supplier delays have worsened to the greatest extent in nearly four years, largely due to ongoing geopolitical conflicts in the Middle East.
The combination of resilient growth and sticky inflation may complicate the Federal Reserve's path forward. While the uptick in hiring is a positive sign for the labor market, the renewed surge in costs could keep interest rates higher for longer. Investors reacted to the data with caution, as the stronger-than-expected services reading suggests the economy may still be running hot enough to warrant a restrictive monetary policy stance.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.