Activity in the vast U.S. services sector accelerated in July, aided in part by spending around the FIFA World Cup and the Independence Day holiday, while the pace of growth in the manufacturing sector eased to the slowest since March amid a slowdown in precautionary stock building prompted by the U.S.-Israeli-led war with Iran.
The Purchasing Managers’ Index surveys from S&P Global suggest the third quarter got off to a solid start, but momentum will be challenged by the one-off nature of the drivers to July’s gains and the recent intensifying of the Iran war, which has sent energy prices spiraling upward again after two months of falling back to near pre-war levels.
S&P Global said its flash services Purchasing Managers’ Index rose to 53.6, the highest since November, from 51.2 in June, helping to power its Composite Output Index up to 53.6, also an eight-month high, from 51.9 last month. The composite gain was restrained by an easing in S&P’s manufacturing PMI to 53.8 from 53.9 in June.
Readings above 50 indicate expansion in activity. Economists polled by Reuters had expected the services PMI to accelerate modestly to 51.5 and the manufacturing PMI to further accelerate to 54.3.
“U.S. businesses reported a good start to the third quarter,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement, adding the data was consistent with gross domestic product expanding at a 2.0% pace so far in the July-September period. The government next week will deliver its first estimate of second-quarter GDP, with a preliminary sample of estimates from economists polled by Reuters seeing growth holding steady at 2.0%, roughly on par with the first-quarter pace of 2.1%.
New services business grew at the fastest since November, while new order growth for factory goods slipped to a four-month low. Employment expanded modestly in both sectors.
“Some of this improvement may prove short-lived as July saw hospitality spend boosted by the FIFA World Cup and USA 250 anniversary activities,” Williamson said. “It was also worrying – though not unexpected – to see manufacturing growth weaken as some of the stock building seen in prior months showed signs of fading. Instead, July saw a concerning intensification of supply chain delays and accompanying renewed upturn in price pressures, constraining growth and subduing demand.”
The recent resumption of air strikes against and by Iran has again shut down traffic in the critical Strait of Hormuz, powering global benchmark oil prices back near $100 a barrel from around $70 at the start of July, and average U.S. gasoline prices have climbed back above $4 a gallon.
That, too, could stifle the improvements seen in July, Williamson said. “Events over recent days in the Middle East will have only further exacerbated these supply chain and price worries and raise downside risks to the near-term outlook for the economy, hinting that July’s upturn may not be the start of an improving trend.”
(Reporting by Dan Burns; Editing by Andrea Ricci)
