US business activity slowed to a five-month low in July, dragged down by slower growth in the services sector, closely watched survey data showed on Monday, but falling input prices and job cuts suggested the Federal Reserve may be making progress on key areas in its efforts to curb inflation.
S&P Global said the Composite US PMI index, which tracks the manufacturing and services sectors, fell to a reading of 52 in July from 53.2 in June. The July reading showed six consecutive months of growth but was limited by increasingly constrained conditions in the services sector. A reading above 50 indicates enlargement.
Somewhat subdued survey data on Monday supported evidence that the US economy was still expanding as the third quarter began, but at a slower pace than in the April to June period.
“The overall rate of revenue growth, measured across manufacturing and services, was consistent with GDP growing at an annual rate of around 1.5% at the start of the third quarter. It's lower than the 2% rate indicated by the survey in the second quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The slowdown may be viewed positively among the Fed, which intends to see activity slow to reduce inflation. On Wednesday, policymakers are expected to raise interest rates by a quarter of a percentage point, to between 5.25% and 5.5%, in what many investors and economists see as the last potential hike in the current cycle.
Overall, GDP is still dependent on growth in the services sector as manufacturing shrinks, but the report shows an increased reliance on international demand as new export orders for services hit their highest level since May 2022. The increase in foreign demand is due to the weakening of the US dollar.
The service activity index fell to 52.4 from 54.4 in June and was weaker than the 54 reading expected among economists in a Reuters poll.
Meanwhile, the survey's manufacturing output index, experiencing growth for the first time in two months, rose to 50.2 from a rate of 46.9 in June. The broader manufacturing PMI index rose but remained in contractionary territory at 49 compared to 46.3 last month and exceeded economists' forecasts for 46.2.
There are some signs in the report that the interest rate hike by the Fed may be on its way to reining in inflation which is still well above the 2% target.
