U.S. Economy Shows Strength Despite Manufacturing Contraction
The U.S. private sector continued to expand in July, driven primarily by a robust services sector, while manufacturing unexpectedly contracted for the first time in six months, according to the latest Purchasing Managers’ Index (PMI) data released by S&P Global. This mixed picture suggests a "Goldilocks" scenario for the economy, with strong growth accompanied by moderating inflation.
Key Takeaways:
- Strong Services Growth: The Services PMI surged to a 28-month high, indicating strong growth in the sector. The service sector has outperformed manufacturing for the fourth consecutive month, with the divergence widening to its largest since June 2022.
- Manufacturing Contraction: The Manufacturing PMI dipped below 50, suggesting a contraction in the sector. Declines in new orders, production, and inventories contributed to this slowdown.
- Moderating Inflation: Price pressures continued to ease in July, indicating that the rate of increase in average prices for goods and services slowed further, aligning with the Federal Reserve’s 2% target.
- Elevated Uncertainty: Business confidence dipped, partly attributed to the rising political uncertainty ahead of the presidential election.
A "Goldilocks" Scenario?
Chris Williamson, chief business economist at S&P Global Market Intelligence, described the latest PMI data as signaling a “Goldilocks" scenario. He highlighted that the economy is growing at a robust pace, with survey data suggesting GDP is rising at an annualized rate of 2.5% following a 2.0% gain in the second quarter. This growth is being driven by the strong services sector, while the slight contraction in manufacturing is not yet cause for major concern.
Concerns About Future Growth
While Williamson welcomed the moderation in price increases, he expressed concern over the uneven nature of growth. The divergence between the robust services sector and the contracting manufacturing sector highlights a potential for future economic imbalances. Additionally, the rising political uncertainty ahead of the election could affect business confidence and investment decisions.
Inflationary Pressures Remain
Despite the moderating price increases, firms are still experiencing rising input costs, driven by higher raw material, shipping, and labor costs. Williamson warned that these higher costs could potentially feed through to higher selling prices if sustained, or cause a squeeze on margins, impacting future economic performance.
Market Reactions
The release of the PMI data had a mixed reaction in the markets. The S&P 500 extended its declines for the session, down 1.5% by 10:15 a.m. in New York. Tesla Inc. was the worst performer among mega caps, down over 11%, on track for its largest one-day drop since late January 2024. Chipmakers resumed the sell-off, with Nvidia Corp. down over 3%. The tech-heavy Nasdaq 100 fell 2.2%, while small caps, as monitored through the iShares Russell 2000 ETF, eased 0.8%.
Conclusion
The July PMI data highlights a mixed picture for the U.S. economy. While the strong services sector is driving growth, the manufacturing sector is contracting, indicating potential for economic imbalances in the future. Inflationary pressures are easing, but remain a concern, with rising input costs potentially feeding through to higher prices. The upcoming presidential election adds further uncertainty to the economic outlook. Investors and businesses will be closely watching future economic indicators to gauge the trajectory of the US economy in the coming months.
