U.S. business activity got a boost in July, with the services sector posting its strongest showing in eight months, though analysts caution the improvement may not hold as the ongoing war involving Iran continues to rattle supply chains and push energy costs higher.
Data from S&P Global’s Purchasing Managers’ Index surveys show the services sector surged to a reading of 53.6 — up from 51.2 in June and the highest level since November. That helped lift the broader Composite Output Index to 53.6 as well, also an eight-month high, compared to 51.9 the previous month. Meanwhile, manufacturing activity edged slightly lower, with its PMI dipping to 53.8 from 53.9 in June — the slowest pace of growth since March. Any reading above 50 signals expansion.
Economists surveyed by Reuters had anticipated a more modest rise in services to 51.5 and expected manufacturing to climb further to 54.3, so the results were mixed compared to expectations.
Chris Williamson, chief business economist at S&P Global Market Intelligence, offered an optimistic but cautious take. “U.S. businesses reported a good start to the third quarter,” he said, noting the figures are consistent with the economy growing at a 2.0% annual rate during the July-through-September period. The federal government is set to release its first estimate of second-quarter GDP next week, with economists polled by Reuters projecting growth held steady at around 2.0% — roughly in line with the first quarter’s 2.1% pace.
New business in the services sector grew at the fastest clip since November, while new orders for manufactured goods slipped to a four-month low. Both sectors saw modest job growth during the month.
Williamson attributed part of July’s services strength to temporary factors. “Some of this improvement may prove short-lived as July saw hospitality spend boosted by the FIFA World Cup and USA 250 anniversary activities,” he 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.”
A major factor clouding the outlook is the renewed escalation of the U.S.-Israeli-led war with Iran. The resumption of airstrikes has once again closed the Strait of Hormuz to shipping traffic, sending global oil prices surging back toward $100 a barrel after falling to around $70 at the start of July. Average gasoline prices across the U.S. have climbed back above $4 per gallon as a result.
Williamson warned those developments cast a shadow over the otherwise encouraging July numbers. “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,” he said.
