US services PMI hits 56.8 as manufacturing slips to 5-month low

US business activity accelerated in August, with the S&P Global composite PMI jumping to 56.0, the highest since April 2022, as services strength more than offset a manufacturing slowdown to a five-month low of 53.2.

"U.S. business is booming, with firms reporting the fastest output growth for over four years so far in the third quarter as the expansion picked up further momentum in August," 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, beating the 54.0 consensus. Manufacturing fell to 53.2 from 53.9, missing the 53.9 forecast. New services business grew at the fastest pace since December 2024, allowing services hiring to expand by the most in 19 months. Factory output growth was the weakest in 13 months, with order growth slowing for a fourth straight month as reduced stock building and supply disruptions from the Iran war and the effective closure of the Strait of Hormuz weighed on goods producers.

The survey data point to annualized third-quarter growth approaching 3.0 percent, up solidly from the 1.5 percent pace in the second quarter, according to S&P Global. That would mark a sharp acceleration nearly two-thirds of the way through the quarter, driven by consumer spending and financial services rather than manufacturing.

Services carry the expansion

The divergence between the two sectors has widened as the Iran conflict drags on. Order growth that jumped after the war began nearly six months ago, as companies sought to pad inventories, has now slowed for four straight months. "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, showing a dependency on consumer spending and financial services growth," Williamson said.

Inflation pressures receded somewhat in August, though growth rates for both input costs and selling prices remain elevated. The average cost increase so far in the third quarter still slightly exceeds what was seen in the second quarter, the report showed. "Price pressures, while fading, also remain elevated and prone to renewed upward pressures should energy prices rise again," Williamson said.

What it means for the Fed

The resilient services data complicate the Federal Reserve's path as it weighs cooling inflation against a still-expanding economy. The report arrives with the US dollar trading near multi-month lows, EUR/USD above 1.1700, and long-dated Treasury yields hovering near multi-year highs — the 30-year yield around 5.25 percent — after the Treasury Department moved to double its buyback of long-dated bonds. Brent crude has climbed to a three-week high above $93 a barrel on the Iran standoff, adding to the inflation backdrop.

The last time the composite PMI exceeded 56 was in April 2022, when the Fed was in the early stages of its tightening cycle and the index subsequently cooled as rate hikes bit. If services momentum holds through the September quarter, markets may price fewer rate cuts into 2027, keeping pressure on rate-sensitive equities even as the expansion continues. The next flash reading, due in September, will show whether the services-led momentum can withstand the drag from higher energy costs and a manufacturing sector still constrained by supply disruptions.

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