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Business activity in the United States gained momentum in July, driven by a sharp improvement in the services sector as spending linked to the FIFA World Cup and Independence Day celebrations lifted demand. However, S&P Global cautioned that the rebound may prove temporary as escalating tensions in the Middle East threaten to reignite inflationary pressures and disrupt supply chains.
According to S&P Global’s Flash Purchasing Managers’ Index (PMI) released on Friday, the services PMI rose to 53.6 in July from 51.2 in June, marking its strongest reading since November. The improvement pushed the Composite Output Index—which combines manufacturing and services—to 53.6, an eight-month high, up from 51.9 in the previous month.
The manufacturing sector, however, showed signs of losing momentum. The manufacturing PMI edged down to 53.8 from 53.9 in June, its weakest pace of expansion since March, reflecting slower inventory accumulation as businesses turned cautious amid the ongoing US-Israeli-led conflict with Iran.
A PMI reading above 50 signals expansion in business activity.
The July data outperformed economists’ expectations. A Reuters poll had forecast the services PMI at 51.5, while the manufacturing PMI was expected to rise to 54.3.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said the latest survey indicates the US economy has started the third quarter on a solid footing, with the data pointing to annualised GDP growth of around 2 per cent in the July-September quarter.
However, Williamson warned that the recent improvement may not be sustainable.
He noted that spending related to the FIFA World Cup and celebrations marking the USA 250th anniversary provided a temporary boost to hospitality and consumer activity. At the same time, manufacturing growth weakened as precautionary stockpiling seen in earlier months began to fade.
The survey also highlighted a fresh rise in supply chain delays and renewed price pressures, factors that could weigh on demand in the coming months.
Adding to concerns, renewed hostilities involving Iran have disrupted shipping through the Strait of Hormuz, sending Brent crude prices back toward $100 a barrel after falling close to $70 earlier this month. Higher energy prices have also pushed average US gasoline prices above $4 per gallon, raising the risk of renewed inflation.
Williamson said the latest escalation in the West Asia is likely to worsen supply chain disruptions and cost pressures, increasing downside risks for the US economy and suggesting that July’s strong performance may not signal the start of a sustained recovery.
