Strong output growth highlights disparities in the health sector, as selling prices rise at a slower pace. Key findings: The US composite output PMI came in at 54.1 in August, down slightly from 54.3 in July, a four-month low. The US services business activity index came in at 55.2, down from 55.0 in July, a two-month high. The US manufacturing output index fell to 47.8 from 50.5 in July, a 14-month low. The US manufacturing PMI came in at 48.0, down from 49.
6 in July, an eight-month low. Data were collected between August 12 and 21, 2024. :US business growth remained strong in August, according to data from the S&P Global US Purchasing Managers’ Index survey. The data points to a sustained economic expansion in the third quarter so far. However, growth gaps widened, with the services sector expanding at a strong and increasing rate, while industrial output fell at the fastest rate in 14 months. At the same time, employment fell due to a bleaker outlook in manufacturing, which has almost halted hiring in that sector. Service sector payrolls also fell due to hiring difficulties.
In terms of inflation, prices for goods and services recorded the smallest increase since June 2020, excluding the decline in January. However, input costs remained at historically high levels.
Output and Demand: The global composite output index of the US PMI fell from 54.3 in July to 54.1 in August, its lowest level in four months. Despite the decline, output has been rising steadily over the past 19 months. Despite a slight slowdown in August, the pace of expansion remains among the highest in the past two years.
Manufacturing PMI output falls for the first time since January
Growth is increasingly unbalanced. While service sector activity expanded strongly and steadily in August, retreating slightly from the 26-month high recorded in June, manufacturing output fell for the first time since January. The decline in factory output was the sharpest since June 2023. The gap between the two sectors in terms of order books also widened. New work flows rose slightly in August, driven by stronger demand for services. New work flows to the services sector recorded the second-largest increase in the past 14 months.
In contrast, new order flows to factories fell for the second month in a row, recording the fastest decline since December. Although the decline in services exports was slight, the decline in manufacturing exports was the largest in 12 months. Future sentiment: Optimism about output in the year ahead rose from a three-month low in July, but remained below the long-term survey average. The improvement in service sector confidence was offset by a more subdued sentiment in manufacturing. While sentiment improved, firms cited brighter prospects on the back of investments in new products and marketing, as well as improved business expectations in line with hopes for lower interest rates and lower inflation. However, optimism was tempered by uncertainty over the presidential election and concerns about future demand.
Employment and Capacity: Employment fell in August, for the first time in three months. Net job losses have been reported in three of the past five months, marking the weakest period of payroll growth since the first half of 2020. The renewed decline in service sector jobs after two months of job gains was accompanied by a near-halt in employment growth in manufacturing, which posted its smallest payroll gain since January. While the decline in services sector employment largely reflected difficulties in hiring and replacing employees who left.
Slower Rise in Fees Despite Continued Upward Pressure
Average prices for goods and services rose at the slowest rate since June 2020, with the exception of the recent decline in January. Inflation is now only slightly above the average recorded in the decade before the pandemic. Although selling price inflation in manufacturing rose, the July reading was the lowest in a year, and the latest reading was slightly above the pre-pandemic average.
Meanwhile, selling price inflation in services slowed to its second-lowest level since May 2020 and slightly above the pre-pandemic average. The slower rise in fees occurred despite continued upward pressure on input prices. Average costs in both manufacturing and services rose at a steady rate in August, matching the four-month high in July. Input price inflation thus remained high by historical standards, particularly in the services sector.
Although the latter slowed slightly from the four-month high in July, input cost inflation accelerated in manufacturing to the highest level since May. Firms cited higher staff costs as the main reason for the price increases, along with higher raw material prices. Manufacturing Purchasing Managers’ Index (PMI) : The US global manufacturing PMI fell to 48.0 in August from 49.6 in July, indicating a deterioration in business conditions in the goods-producing sector for the second straight month and the sharpest decline since December.
All five components of the PMI declined in August. The sharp declines in new orders and inventories were accompanied by the first decline in factory output in seven months. At the same time, employment growth slowed to near stagnation. Supplier delivery times also narrowed to the sharpest since February, a sign that suppliers are becoming less busy amid weak demand for raw materials: Factory purchases of inputs fell at the fastest rate in eight months.
Finished goods inventories rise significantly for the third time
Finished goods inventories rose significantly for the third time in the past four months, with the latest buildup in non-finished inventory among the largest on record in the industry. Commenting on the data, Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The strong growth picture in August points to solid GDP growth above 2% y/y in the third quarter, which should help to ease fears of a recession in the near term. Similarly, the decline in selling price inflation to near the pre-pandemic average suggests inflation is “normalizing” and adds to the case for lower interest rates.
This “soft landing” scenario looks less convincing, however, when you scratch the surface of the headline numbers. Growth has become increasingly service-driven as manufacturing, which often drives the economic cycle, has declined. The ratio of orders to inventories in the manufacturing sector fell to its lowest level since the global financial crisis.
