U.S. business activity growth slows as services soften
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[July 25, 2023] By
Safiyah Riddle
(Reuters) -U.S. business activity slowed to a five-month low in July,
dragged down by decelerating service-sector growth, closely watched
survey data on Monday showed, but falling input prices and slowed hiring
indicate the Federal Reserve could be making progress on important
fronts in its bid to reduce inflation.
S&P Global said its flash U.S. Composite PMI index, which tracks
manufacturing and service sectors, fell to a reading of 52 in July from
53.2 in June. July's reading showed the sixth straight month of growth
but was restrained by softening conditions in the service sector.
Readings above 50 indicate expansion.
Monday's tepid survey data supported evidence that the U.S. economy was
still growing as the third quarter began, but at a slower rate from the
April-through-June period.
"The overall rate of output growth, measured across manufacturing and
services, is consistent with GDP expanding at an annualized quarterly
rate of approximately 1.5% at the start of the third quarter. That's
down from a 2% pace signaled 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 at the Fed, which is keen to see
activity cool to lower inflation. On Wednesday policymakers are expected
to raise interest rates by a quarter percentage point, to between 5.25%
and 5.5%, in what many investors and economists see as potentially their
last increase of the current cycle.
Bill Adams, chief economist for Comerica Bank, said the survey added to
a growing list of signs that inflation is calming down and conditions
overall are cooling, despite some pockets of stubborn consumer spending.
"The unemployment rate is still near a half-century low, but the economy
on average is less hot in 2023 as the effects of pandemic-era stimulus
fade, higher interest rates weigh on credit-intensive activity, and job
growth moderates," Adams said.
Overall, GDP is still heavily reliant on growth in the service sector as
manufacturing contracts, but the report showed an increasing dependence
on international demand as new export orders for services reached the
highest levels since May 2022. The increase in foreign demand was due to
a weakening U.S. dollar.
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A waiter walks among diners at Peter
Luger Steak House in Brooklyn, New York City, U.S., August 12, 2021.
REUTERS/Andrew Kelly/File Photo
The services activity index fell to 52.4 from 54.4 in June and was
weaker than the reading of 54 expected among economists in a Reuters
poll.
The survey's manufacturing output index, meanwhile, experienced
growth for the first time in two months, rising to 50.2 from a
contracting rate of 46.9 in June. The broader manufacturing PMI
index was improved but still in contraction territory at 49 versus
46.3 last month and topped economists' forecast for 46.2.
MIXED OUTLOOK
The report included several signs that suggested the Fed's interest
rate hikes might be making progress towards taming inflation that
remains well above its 2% target.
Firms in manufacturing and services both increased workforce
headcount in July, but the combined rate of job creation was at a
six-month low, suggesting a cooling in an otherwise resilient job
market.
Meanwhile, increases in total input prices softened to the lowest
levels since October 2020, but masked a split across industries:
While the service sector also experienced the lowest cost pressures
in over 2-1/2 years, inputs in manufacturing rebounded to a
three-month high.
Domestic demand was subdued as new orders weakened for the second
straight month.
Williamson said optimism in the private sector is faltering: The
overall future outlook fell to the lowest levels since December
2022.
"The darkening picture adds downside risks to output growth in the
coming months which, alongside the slowing in the pace of expansion
in July, will keep alive fear that the U.S. economy may yet succumb
to another downturn before the year is out," said Williamson.
(Reporting by Safiyah Riddle; Editing by Andrea Ricci and Richard
Chang)
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