US business activity declines for the first time since 2020: PMI

The economy is showing signs of "worrying deterioration," says an S&P Global economist.

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In July, private sector firms in the US recorded their first dip in activity since June 2020, according to the latest “flash” PMI data from S&P Global.

The PMI’s composite index was 47.5 in July, down notably from 52.3 in June. The decline was seen across the service and manufacturing sectors, though it was services that accounted for most of the drop.

That rate of decline hasn’t been seen since the early stages of the COVID-19 pandemic, S&P Global said.

The PMI, short for the Purchasing Managers’ Index, is a measure of business activity, serving as one indicator of the economy’s health. It is used by central banks to make decisions, and can also provide a snapshot of the overall state of activity between businesses as they serve each other, and provide the goods that make their way to consumers.The index is compiled through a survey of around 800 companies in the US manufacturing and service sectors. S&P Global provides an initial “flash” reading that accounts for about 85% of the survey responses. A final reading will be available August 1.

Reporting the results of the survey, S&P Global made the following observations:

  • New orders: There was pressure on demand arising from inflation and COVID-19. Services companies had a “marginal” increase in new business, while businesses fell for manufacturers.
  • Input costs such as fuel transportation are also rising. However, the pace of inflation on these costs slowed from a peak in May.
  • Selling prices are higher, as firms pass those higher input costs onto consumers.
  • Staffing numbers showed the weakest increase since February, though the services sector had a strong increase in hiring.
  • Business confidence is at its lowest since September 2020.

In commentary, S&P Global raised the specter of the American economy’s two toughest moments of the last 20 years: The 2009 recession and the 2020 pandemic shock as comparison points for the current environment.

The preliminary data points toward a "worrying deterioration in the economy," said Chris Williamson, chief business economist at S&P Global Market Intelligence, in comments provided by PMI. Manufacturing has "stalled" and a rebound in activity in the service sector from the pandemic is now heading in the other direction, Williamson said. "Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis, with the survey data indicative of GDP falling at an annualised rate of approximately 1%. Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest," Williamson said.

“An increased rate of order book deterioration, with backlogs of work dropping sharply in July, reflects an excess of operating capacity relative to demand growth and points to output across both manufacturing and services being cut back further in coming months unless demand revives," Williamson said. "However, with companies’ expectations of future growth slumping to the lowest since the early days of the pandemic, any such revival is not being anticipated. Instead, firms are already reassessing their production and workforce needs, resulting in slower employment growth."

However, Williamson did note that a “weakening demand environment” was bringing price easing, with the rate of inflation down to a 16-month low. This could offer one sign that the Federal Reserve’s action to raise interest rates are having the desired effect of cooling off the economy. However, it remains to be seen whether those moves end up causing damage in other areas such as jobs and activity. The Federal Reserve is set to announce its July decision on whether to once again raise interest rates on Wednesday, July 27.

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