Flash US PMI signals growth slowdown but stubborn price pressures at start of third quarter

Chris Williamson
July 23, 2023

Flash US PMI signals growth slowdown but stubborn price pressures at start of third quarter

July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation, according to flash PMI data compiled for the US by S&P Global.

Growth slows in July

The overall rate of output growth, measured across manufacturing and services, remained solid in July, marking an encouraging start to the third quarter. Although the pace of expansion moderated, with the S&P Global flash composite output index dropping from 53.2 in June to 52.0, the latest data are consistent with GDP expanding at an annualized quarterly rate of approximately 1.5%. That's down from a 2% pace signaled by the survey in the second quarter.

Sector divergences were noteworthy, however, and underscore the areas of weakness in the economy that need to be monitored going forward.

Although manufacturing remained a drag on the economy, factory output stabilized after June's downturn, helped in turn by slowing contractions in new orders and exports. Nevertheless, companies continued to report the need to cut costs via inventory reduction policies due principally to a further steep fall in backlogs of work, the latter indicative of excess capacity.

Service sector output growth meanwhile weakened, moderating for a second successive month to the softest since February. Leading the slowing in the service sector was a cooling of domestic demand. In contrast, exports of services, a large slice of which is tourism and other spending by foreign visitors in the US, rose at the fastest rate since May of last year.

The data therefore suggest that domestic demand growth may be slowing, likely in response to higher interest rates and the increased cost of living, but that the post-pandemic travel and tourism rebound remains an important driver of the economy.

Sticky prices

Also of concern alongside the slowing pace of expansion was a stickiness of price pressures in July. Although the survey gauge tracking average prices charged for goods and services has fallen sharply compared to the peaks seen in the spring of 2022, this index remains elevated by historical standards and even ticked higher in July, continuing to run at a level broadly consistent with headline consumer price inflation running at a 3% annual rate.

As this survey index of selling prices has acted as a reliable leading indicator of CPI it sends a worrying signal that further falls in the rate of inflation below 3% may prove elusive in the near term.

Looking further into price trends, the main upward pressures continue to emanate from the service sector, with manufacturing input costs and selling prices both rising only marginally during the month. Falling raw material prices, linked in turn to declining demand and improving supply conditions, helped offset higher oil prices during the month.

In the service sector, input cost and selling price inflation remained elevated by historical standards, albeit both down sharply from levels seen in early 2022, buoyed by upward wage costs.


Looking ahead, business optimism about the year-ahead outlook deteriorated sharply to the lowest seen so far this year. An improvement in sentiment in the manufacturing sector was greatly outweighed by a much gloomier picture in the service sector. On balance, the darkening outlook 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 US may yet succumb to another downturn before the year is out.

Chris Williamson, Chief Business Economist, S&P Global Market Intelligence

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