Data from the August 2024 US Services PMI indicates that US business activity continues to grow, although the overall picture highlights widening gaps between different sectors. The index’s composite output fell slightly to 54.1, a four-month low, while the service business activity index rose to 55.2, the highest in two months. In contrast, the industrial output index hit a 14-month low of 47.8, and the manufacturing PMI fell to 48.0, an 8-month low.
Widening gaps between sectors
While the services sector showed a strong performance, recording high growth, the industrial sector witnessed a significant decline. Industrial production has fallen for more than 14 months, the largest decline since June 2023. Gaps between the two sectors continue to widen, with demand in the services sector growing further, while factory orders decline significantly.
Forecasting & Employment
Optimism about future economic growth has grown, although challenges persist. While confidence in the services sector rose, anxiety persisted in the manufacturing sector. Employment data was impacted, as we saw the first decline in hiring in three months. The decline was attributed to difficulties in employment within the services sector and lack of employment in the industrial sector due to concerns about the future.
Input prices and inflation
Median prices of goods and services recorded the slowest growth rate since June 2020, with the exception of the last decline seen in January. Input price inflation rose steadily in August, as costs increased significantly, especially in the services sector. Despite a slight slowdown in selling prices, inflation remains at relatively high levels by historical standards..
Conclusions
The data suggests that the U.S. economy is witnessing sustained expansion, but with significant variation between the services and industry sectors. While the services sector continues to perform strongly, the industrial sector suffers from a clear weakness.
Services PMI components and their economic importance
The Services PMI report (Services PMI) usually consists of several key components that provide insights into the state of the services sector. These components include:
Business activity: This component measures the level of business activity in the services sector during the reporting period. It reflects whether companies are experiencing growth, contraction or stability in their operations.
New orders: New orders refer to the demand for services in the market. An increase in new orders indicates increased demand, while a decline may indicate weaker demand.
Employment: The Employment component of the Services PMI report shows changes in the level of employment within the services sector. It indicates whether companies are hiring, laying off, or maintaining their workforce.
Work arrears: Work arrears represent the amount of unfinished work accumulated by service providers. A high level of arrears may indicate capacity constraints or increased demand.
Business Outlook: This component measures providers’ sentiment regarding future business conditions. A positive outlook can indicate confidence in future growth, while a negative outlook may indicate concerns about economic conditions.
Supplier deliveries: Supplier deliveries measure the speed at which services are delivered by suppliers to businesses. Slower deliveries may indicate supply chain disruptions or increased demand.
Composite PMI: The composite PMI combines the Services PMI and the Manufacturing PMI to provide a comprehensive overview of economic activity in both the services and manufacturing sectors.
Together, these components provide a detailed picture of the health and performance of the service sector, providing valuable insights into economic trends, business conditions and potential future developments. Analyzing these components helps businesses, policymakers, and investors make informed decisions based on the current state of the service industry.
Difference between PMI for services and manufacturing
The services PMI (services PMI) and the manufacturing PMI (manufacturing PMI) are both important indicators of economic health, but they focus on different sectors of the economy. Here are some of the key differences between the two:
Sector Focus:
- The Services PMI measures business activity in the services sector, which includes industries such as healthcare, finance, retail, hospitality, and transportation.
- On the other hand, the manufacturing PMI focuses on the manufacturing sector, which involves the production of physical goods such as automobiles, machinery, and electronics.
Nature of output:
- The PMI in the services sector reflects the provision of intangible services, such as consulting, education, healthcare and tourism.
- The manufacturing PMI reflects the production of tangible goods in factories and facilities.
Differences in the supply chain:
- Manufacturing usually involves complex supply chains with raw materials, intermediate goods, and finished products. The manufacturing PMI often includes components such as supplier deliveries and inventories.
- Services are often delivered directly to consumers or other businesses, relying less on complex supply chains than manufacturing.
Factors affecting performance:
- The performance of the services sector is closely linked to consumer spending, business investment, and general economic sentiment.
- The performance of the manufacturing sector is influenced by factors such as global demand for goods, industrial production, and input costs.
Impact on the economy:
- The services sector tends to be more resilient during economic downturns, when demand for certain services such as healthcare and education remains relatively stable.
- Manufacturing is more cyclical and sensitive to changes in world trade, industrial production, and consumer demand for durable goods.
Employment Patterns:
- The services sector is often more labor-intensive than manufacturing, with a higher proportion of service jobs in many economies.
