Daily Management Review

With A Weakening Services Sector Growth, U.S. Business Activity Growth Also Decreases


With A Weakening Services Sector Growth, U.S. Business Activity Growth Also Decreases
According to closely watched survey data released on Monday, the growth of the service sector contributed to a five-month low in U.S. business activity in July. However, falling input prices and slower hiring suggest the Federal Reserve may be making progress on key fronts in its fight against inflation.
According to S&P Global, the manufacturing and service sectors' flash U.S. Composite PMI index decreased from a reading of 53.2 in June to a reading of 52 in July. The reading for July indicated rise for the sixth consecutive month, but it was constrained by deteriorating service sector conditions. Expanding is indicated by readings above 50.
The muted poll results released on Monday bolstered evidence that the U.S. economy was still expanding as the third quarter got underway, albeit more slowly than it had been from April through June.
"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 signaled by the survey in the second quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The Fed, which wants to see activity drop to reduce inflation, may perceive the downturn favourably. Interest rates are anticipated to be increased by a quarter percentage point on Wednesday, to a range of 5.25% and 5.5%, in what many economists and investors believe could be the final increase of the current cycle.
Despite some pockets of stubborn consumer spending, Bill Adams, chief economist at Comerica Bank, said the survey contributed to a growing list of indicators that inflation is slowing and the economy is cooling generally.
"The unemployment rate is still near a half-century low, but the economy on average is less hot in 2023 as the effects of pandemic-era stimulus fade, higher interest rates weigh on credit-intensive activity, and job growth moderates," Adams said.
Overall, as manufacturing shrinks, GDP continues to be largely dependent on the expansion of the service sector. However, the data revealed a growing reliance on global demand as new export orders for services rose to their highest levels since May 2022. The decline of the US dollar was the cause of the rise in overseas demand.
The services activity index decreased from 54.4 in June to 52.4 this month, which was below the level of 54 economists predicted in a Reuters survey.
Meanwhile, the survey's manufacturing production index increased for the first time in two months, going from a declining rate of 46.9 in June to 50.2 today. The overall manufacturing PMI index increased from 46.3 to 49 this month, exceeding economists' expectations of 46.2 while remaining in the contractionary range.
The report contained a number of indicators that suggested the Fed's interest rate increases might be progressing in taming inflation, which is still much above its 2% target.
Manufacturing and service sector businesses both grew their employee headcounts in July, but the overall rate of job creation fell to a six-month low, indicating a slowdown in an otherwise robust labour market.
The disparity among industries was concealed, however, as growth in overall input costs fell to their lowest levels since October 2020. Although cost pressures in the service sector were likewise at their lowest level in more than two and a half years, manufacturing inputs recovered to a three-month high.
Because new orders declined for the second consecutive month, domestic demand was muted.
Williamson claimed that the private sector's optimism is waning: The general view for the future dropped to its lowest points since December 2022.
"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 U.S. economy may yet succumb to another downturn before the year is out," said Williamson.