US business activity accelerated significantly in July, with the S&P Global Services PMI rising to 53.6, the highest since November, up from 51.2 in June. According to S&P Global, this strong performance helped power the Composite Output Index up to 53.6, also an eight-month high, from 51.9 last month. However, economists polled by Reuters had expected the services PMI to accelerate modestly to 51.5 and the manufacturing PMI to further accelerate to 54.3, making the actual readings stronger than anticipated. The Composite Output Index reached 53.6, also an eight-month high, though this was restrained by an easing in S&P's manufacturing PMI to 53.8 from 53.9 in June.
While services showed strong momentum, the manufacturing sector experienced a notable slowdown. As reported by S&P Global, new order growth for factory goods slipped to a four-month low, with manufacturing growth weakening as some of the stock building seen in prior months showed signs of fading. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that July saw a concerning intensification of supply chain delays and accompanying renewed upturn in price pressures, constraining growth and subduing demand. The manufacturing PMI's easing to 53.8 from 53.9 in June reflects these supply chain disruptions and reduced precautionary stock building.
The strong July performance supports expectations for continued economic expansion. According to S&P Global, US businesses reported a good start to the third quarter, with the data consistent with gross domestic product expanding at a 2.0 percent pace so far in the July-September period. The government will deliver its first estimate of second-quarter GDP on July 30, with the median estimate ticking up to 2.1% from 1.8% on July 18, while the Econoday consensus is slightly higher at 2.3%. New services business grew at the fastest pace since November, while employment expanded modestly in both sectors, supporting the overall economic momentum.
The recent resumption of air strikes against and by Iran has significantly impacted energy markets and could undermine July's business improvements. As reported by S&P Global, the recent resumption of air strikes against and by Iran has again shut down traffic in the critical Strait of Hormuz, powering global benchmark oil prices back near US$100 a barrel from around US$70 at the start of July. Average US gasoline prices have climbed back above US$4 a gallon, creating additional cost pressures for businesses. The Iran conflict remains a key risk by keeping energy prices elevated, which ripples through supply chains, raises costs, and adds pressure on the Federal Reserve to tighten policy. The threat of further escalation continues to act as a tax on growth by lifting energy costs and complicating trade flows.
Despite geopolitical tensions, the US labor market continues to demonstrate remarkable resilience. New filings for unemployment benefits fell to 187,000 last week—the lowest since 1969, with layoffs remaining low and jobless claims at a half-century low alongside $100 oil prices. This combination suggests a labor market with virtually no slack, which could become problematic if the Iran conflict persists. Consumer spending has held up, supported by income growth and the labor market's continued modest job additions. However, as Investing.com notes, a brief lull in hostilities this morning hints at improvement, but after five months of stop-and-start warfare, visibility remains poor, making the first half of the year a poor guide to what the second half ultimately delivers.
