The US services sector experienced an extraordinarily rapid acceleration in August 2026, with S&P Global's flash PMI data showing the Composite Output Index increasing from 54.5 to 56.0, marking the strongest performance since April 2022. According to S&P Global's latest data, the Flash Services Purchasing Managers' Index rose from 54.6 in July to 56.8, representing the best performance since December 2024. As reported by Reuters, this strong services performance more than offset a notable slowdown in manufacturing, with the manufacturing PMI softening to a five-month low of 53.2 from 53.9 in July. The latest nowcasts from The Capital Spectator confirm this robust pickup, with the median Q3 estimate reaching 2.3%, well above the sluggish 1.5% annualized increase reported for Q2.
Despite the strong services performance, consumer spending patterns are indicating a shift toward value-focused purchasing behavior. According to Walmart CFO John David Rainey, customers are still spending steadily but their priority has shifted to finding lower prices. During the quarter, Walmart cut prices on more than 11,000 items, nearly twice the usual number of price changes in a three-month period, financing these reductions with tariff refunds. While Target and Home Depot both reported higher sales for the same period, indicating consumers are still willing to spend, the pace is slowing significantly. Retail sales posted a 0.6% drop in July—the first monthly decline since January and the deepest in over a year. Economists expect consumer spending to grow at a 2.1% annual rate in the third quarter, down from 3.2% in the second quarter.
The services-led growth surge has significantly improved US economic outlook for the third quarter. According to S&P Global's chief business economist Chris Williamson, annualized economic growth is expected to reach 3.0% in Q3, up from 1.5% in Q2. As reported by Reuters, nearly two-thirds of the way through the current quarter, the PMI surveys indicate that overall US economic growth is on course to double the 1.5% annualized expansion rate from the second quarter. The median 2.3% Q3 nowcast from The Capital Spectator continues to track well above Q2's 1.5% increase, representing a best guess based on available numbers. The services sector's performance was particularly strong, with hiring increasing by the greatest amount in 19 months due to the strongest rise in new services business since December 2024.
While services drive growth, rising Treasury yields present a significant risk to the economic outlook. The 10-year yield closed at 4.74% on Friday, marking a rebound to just a few ticks below a one-year-plus high reached a few weeks earlier. According to The Capital Spectator, the ongoing rise in Treasury yields could pressure households by lifting borrowing costs and squeezing discretionary income. The Dallas Fed's Weekly Economic Index (WEI) continues to ease, with the latest data showing a 2.6% year-over-year increase in GDP through Aug. 15, which is modestly above the one-year rise through Q2, but the tide appears to be turning. If yields continue rising from current levels, consumer spending will come under more pressure, a risk that will come into sharper focus in Q4.
While services drove growth, the manufacturing sector continues to face significant headwinds from geopolitical tensions. According to S&P Global's data, factory output growth was at its lowest point in 13 months, while order growth fell for a fourth consecutive month. The ongoing tensions from the Iran War have caused the crucial Strait of Hormuz to effectively close, blocking the flow of essential commodity supplies and driving up energy costs. As reported by Reuters, economists had predicted that the services PMI would slow to 54.0 from July's pace, but the actual performance exceeded expectations significantly. The manufacturing sector's challenges are compounded by the ongoing geopolitical tensions, creating additional uncertainty for economic recovery.
