August Services Growth Exceeds Expectations As Manufacturing Slumps: Inflation Gradually Eases 'To Normal Levels'

U.S. private sector activity likely expanded more than expected this month, driven by growth in the services sector that outweighed the deepening contraction in manufacturing, according to preliminary Purchasing Managers’ Index (PMI) surveys released by S&P Global on Thursday.

The flash Composite PMI index slightly declined from 54.3 in July to 54.1 in August, yet it exceeded expectations of a drop to 53.5. This marks the 19th consecutive month of overall private sector expansion in the United States.

Services Outshine Manufacturing

However, the contrast between sectors is growing. The services sector showed strong performance, while manufacturing output saw its steepest decline in 14 months.

The flash Services PMI index rose to 55.2, up from July’s 55, surpassing the forecasted 54. On the other hand, the flash Manufacturing PMI index fell to 48, down from both the previous reading and the expected 49.6.

Manufacturing faced intensified declines in new orders and inventories, along with the first drop in factory production in seven months.

“Brighter news on inflation, with prices charged for goods and services registering the smallest rise since June 2020,” the report highlighted.

According to S&P Global, price pressures have eased significantly and are now only slightly above the average recorded in the decade before the pandemic.

Cooling Labor Market Raises Concerns

Signs of a cooling labor market emerged in August, as employment fell for the first time in three months. The private sector has reported net job losses in three of the past five months, marking the weakest period of payroll growth since the first half of 2020.

“While falling employment in the service sector largely reflected difficulties hiring staff and replacing leavers, the cooling job market in manufacturing was driven by growing concerns about the business outlook,” S&P Global stated.

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Data Alleviates Recession Fears, Inflation Outlook Improves

“The solid growth picture in August points to robust GDP growth in excess of 2% annualized in the third quarter, which should help allay near-term recession fears,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Williamson added that the pricing dynamics observed in the August surveys “add to the case for lower interest rates.” However, he cautioned that economic growth is increasingly reliant on the service sector, as manufacturing—which typically leads the economic cycle—has entered a decline.

“On balance, the key takeaways from the survey are that inflation is continuing to slowly return to normal levels and that the economy is at risk of slowing amid imbalances,” Williamson concluded.

Market Reactions: Dollar Rallies, Yields Rise, Stocks Ease

The U.S. dollar index (DXY), as tracked by the Invesco DB USD Index Bullish Fund ETF UUP, rallied after the release of the August PMI report.

A measure of the greenback was up 0.4% against a basket of currencies, on track to snap a four-day losing streak.

The dollar soared 0.9% on Thursday against the Japanese yen, as positive economic data slightly reduced market convictions for outsized Fed rate cuts.

Treasury yields rose across the board, pushing the iShares 20+ Year Treasury Bond ETF TLT down by 0.8%.

U.S. major indices reacted negatively to the release. The tech-heavy Nasdaq 100 index, as tracked by the Invesco QQQ Trust QQQ flipped into negative territory at 10:10 a.m. ET. The S&P 500, as monitored through the SPDR S&P 500 ETF Trust SPY, was flat.

Gold was among the heaviest hit, with the yellow metal dropping 1.3%, on track for its worst session in more than two weeks.

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