US Manufacturing Activity Rebounds, Services Growth Slows: How Do Latest PMIs Influence The Fed's Policy Forecast?

The Purchasing Managers’ Index (PMI) data released Monday by S&P Global indicates that the private sector’s economic activity in the United States continues to show strong resilience in July.

Furthermore, the notable contrast between robust growth in the services sector and the contraction in manufacturing has narrowed, suggesting reduced divergence among different sectors of the economy.

The S&P Global U.S. Manufacturing PMI recorded an increase from 46.3 in June to 49 in July, breaking the trend of two consecutive months of declines and surpassing expectations of 46.2.

The S&P Global U.S. Services PMI fell from 54.4 in June to 52.4 in July, marking the second consecutive monthly decline, and missing expectations of 54. The service activity gauge fell to the lowest since February 2023.

The S&P Global US Composite PMI fell from 53.2 in June to 52 in July, at the lowest since March 2023.

The U.S. dollar reacted positively to the release, with the Invesco DB USD Index Bullish Fund ETF UUP up 0.2% for the day, while tech stocks, as tracked by the Invesco QQQ Trust QQQ, shifted into negative territory.

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Key Takeaways From The Most Recent S&P PMI Data For The U.S.

Despite the rebound, manufacturing activity remains in contraction, as the index hovers below the critical 50 level.

The survey revealed that U.S. manufacturers sought to trim stocks further and engage in cost-cutting efforts amid muted domestic and international demand conditions.

On the other hand, services continue to expand, albeit at a softer pace. Services firms reported the slowest rise in employment for six months in July, continuing to highlight challenges in retaining and attracting staff due to rising wage costs.

Chris Williamson, chief business economist at S&P Global Market Intelligence said that “growth is being entirely driven by the service sector, and in particular rising spend from international
clients,” adding that “business optimism about the year-ahead outlook has deteriorated sharply to the lowest seen so far.” The economist warned that “stickiness of price pressures remains a
major concern” and that “further falls in the rate of inflation below 3% may prove elusive in the near term.”

What Effect Might This Have on Fed Policy?

The Federal Reserve is widely expected to raise interest rates by 25 basis points this week, reaching a target range of 5.25-5.5%, the highest in over two decades.

Fed members continue to work toward bringing inflation to the 2% target, and while they have seen positive improvement in recent months, they have not yet reached their goal.

Policymakers will take notice of the economy’s performance and the resilience shown thus far in the services sector and labor market, which, at least in the medium term, reduces the likelihood of the Fed becoming too “dovish.”

The Fed may continue to retain a “data-dependent” approach, providing flexibility for potential changes in interest rates based on incoming economic data.

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