Service Sector Growth Weakens in July, Sticky Inflation Persists

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The US Manufacturing PMI improved a bit but remains in contraction as service sector growth weakens.

S&P reports US expansion loses momentum as service sector growth slows in July.

S&P US Composite PMI™ Key Points

• Flash US PMI Composite Output Index at 52.0 (June: 53.2). 5-month low.
• Flash US Services Business Activity Index at 52.4 (June: 54.4). 5-month low. Flash US Manufacturing Output Index(4) at 50.2 (June: 46.9). 2-month high.
• Flash US Manufacturing PMI at 49.0 (June: 46.3). 3-month high.

Overview

US companies signalled a further rise in business activity during July, with the service sector continuing to drive growth. Nonetheless, the rate of expansion eased to the slowest for five months, as service providers registered a softer upturn in output and manufacturers reported broadly unchanged levels of production at the start of the third quarter.

New orders remained in expansion territory, albeit rising at a softer pace. A sustained rise in new export orders for services helped support the upturn as domestic demand lost some momentum, often due to higher interest rates.

On the price front, elevated cost pressures continued to be led by the service sector. However, manufacturers saw a renewed rise in input prices, and services firms reported a slower uptick in operating expenses.

Services firms reported the slowest rise in employment for six months in July, continuing to highlight challenges retaining and attracting staff due to rising wage costs.

Chris Williamson, S&P Chief Business Economist Comments

• “July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation.
• “The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That’s down from a 2% pace signalled by the survey in the second quarter.
• “However, growth is being entirely driven by the service sector, and in particular rising spend from international clients, which is helping offset a becalmed manufacturing sector and increasingly subdued demand from US households and businesses.
• “Furthermore, business optimism about the year-ahead outlook has deteriorated sharply to the lowest seen so far this year. The darkening picture adds downside risks to output growth in the coming months which, alongside the slowing in the pace of expansion in July, will keep alive fear that the US economy may yet succumb to another downturn before the year is out. “
• The stickiness of price pressures meanwhile remains a major concern. As the survey index of selling prices has acted as a reliable leading indicator of consumer price inflation, anticipating the easing to 3% in June, it sends a worrying signal that further falls in the rate of inflation below 3% may prove elusive in the near term.