Manufacturing PMI Falls to Contraction in July

Manufacturing Sector: Contraction

The Flash Manufacturing PMI fell to 49.5 in July, down from 51.6 in June and exactly in line with estimates. This drop below the 50.0 threshold indicates a contraction in the manufacturing sector for the first time since December. The decline was driven by sharp decreases in new orders, falling production levels, reduced inventory levels, and slower employment growth. The only positive influence was a marginal lengthening of suppliers’ delivery times, though this effect was very slight.

Services Sector: Strong Expansion

In contrast, the Flash Services PMI rose to 56.0 in July, up from 55.3 in June and meeting expectations. This indicates the fastest expansion in the services sector since March 2022. Key drivers include an accelerated inflow of new business and continued employment growth, albeit at a slower pace than in June. The sector still faces persistent inflationary pressures, though the rate of price increases has moderated.

Economic Divergence and Concerns

The gap between manufacturing and services performance is now at its widest since June 2023, highlighting the uneven nature of the current economic expansion. Despite overall positive headline figures, business confidence for the year ahead declined to a three-month low. This drop in sentiment is largely attributed to uncertainty surrounding the upcoming Presidential Election and persistent high living costs. Employment growth, while still positive, slowed in both sectors compared to June.

Inflation Trends

The inflation picture presents a mix of positive and negative signals. On the positive side, average prices charged for goods and services rose at the slowest rate since January, suggesting progress on disinflation. However, input costs across both sectors increased at the fastest rate in four months. This cost pressure is driven by higher prices for raw materials, energy, and logistics, as well as rising labor costs.

Overall Economic Picture

The composite data suggests an economy growing at a robust pace, with an estimated annualized GDP growth rate of 2.5% for the start of the third quarter. However, the stark sectoral divergence, political uncertainties, and the potential for renewed inflationary pressures present challenges that warrant close monitoring in the coming months.

Conclusion

While the US economy shows strong overall growth, primarily driven by the services sector, it faces a complex landscape. The manufacturing contraction, widening sectoral divergence, political uncertainties surrounding the 2024 Presidential Election, and underlying inflationary pressures all contribute to a nuanced economic outlook that will require careful navigation in the months ahead.