US Composite PMI Jumps to 56, Complicating Fed Rate-Cut Path

US business activity accelerated in August, with the composite PMI at 56 pointing to third-quarter growth near 3 percent.

US business activity accelerated in August as the strongest services growth in nearly two years lifted the composite PMI to 56, pointing to third-quarter growth near 3 percent and complicating the Federal Reserve's rate-cut calculus.

"U.S. business is booming, with firms reporting the fastest output growth for over four years so far in the third quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The flash services PMI rose to 56.8, the highest since December 2024, from 54.6 in July, while the composite output index climbed to 56.0, the strongest since April 2022. Manufacturing eased to a five-month low of 53.2 from 53.9 as reduced stock building and supply disruptions from the US-led war with Iran restrained factory output. New services business grew at the fastest pace since December 2024, allowing services hiring to expand by the most in 19 months.

The resilience complicates the Fed's path. Strong services demand reduces the urgency for aggressive rate cuts, yet elevated input costs — with the average third-quarter increase still exceeding the second quarter — keep inflation pressures alive. Markets responded by pushing the 30-year Treasury yield up 6 basis points to 5.25 percent, while the S&P 500 fell 0.87 percent.

Services Carry the Expansion

The divergence between the two sectors is sharpening. Services firms reported the fastest output growth in over four years, while factory output growth was the weakest in 13 months as order growth slowed for a fourth straight month. "As reduced safety stock building and supply delays dampen factory production growth, the service sector is now playing a key role in driving a sustained U.S. expansion," Williamson said.

The manufacturing weakness traces to the effective closure of the Strait of Hormuz, which has disrupted commodity flows and sent energy prices higher. Brent crude rose 1.7 percent to its highest level since July 22, adding to the inflation worries already driving the global bond selloff. The reading also marks a sharp reversal from July, when World Cup and Independence Day spending helped lift the composite to 54.5.

Price Pressures Persist

Inflation remains the key constraint on Fed easing. Input cost growth eased in August but stayed elevated, and the average cost increase so far in the third quarter still slightly exceeds the second quarter's pace. "Price pressures, while fading, also remain elevated and prone to renewed upward pressures should energy prices rise again," Williamson said.

The stronger-than-expected data rippled through global markets. The 30-year Treasury yield reversed nearly all of the previous session's decline after the Treasury Department doubled its bond buyback program, while the Nasdaq fell 1.00 percent and the Dow dropped 1.32 percent. In Australia, the S&P/ASX 200 slipped 0.42 percent as higher oil prices and long-duration bond yields near multi-year highs weighed on equities.

The data lands as the Fed weighs the pace of easing against a labor market that remains historically tight. With the composite reading at its strongest since April 2022 and third-quarter growth tracking near 3 percent, policymakers face a delicate balance: cut too slowly and risk a growth overshoot that reignites inflation; cut too fast and risk fueling asset bubbles. The next policy decision will hinge on whether August's services strength proves durable or fades as the World Cup and Independence Day spending tailwinds that boosted July recede.

This article is for informational purposes only and does not constitute investment advice.