Flash PMIs show US outperformance gaining ground in July

The flash PMI data compiled by S&P Global Market Intelligence indicated that the US reported a growing outperformance of business output growth among the four largest developed economies - the 'G4'. Growth is being spurred principally by the services economies of the major developed economies, and notably that of the US, linked in part to improving financial conditions. However, the US also reported the steepest rise in prices and the gloomiest prospects for the year ahead of the G4.

US reports fastest output growth

The US once again reported the fastest growth of output of the G4 economies in July, according to early PMI data, outpacing the other major developed economies for the thirteenth time in the past 15 months and to the greatest extent since January.

While the US flash PMI composite output index (covering manufacturing and services) rose to 54.6 at the start of the third quarter, reaching its highest so far this year and one of the highest levels recorded over the past three years, far lower readings were seen elsewhere. The equivalent PMI index for Japan registered 51.5 while the eurozone and UK equivalents both registered 51.0, indicating especially modest economic growth.

Manufacturing trends distorted by tariffs

Somewhat counterintuitively for an economy in which the administration is focusing policy on supporting the manufacturing sector, the acceleration of growth in the US was driven by the services sector, where business activity rose sharply and at the fastest pace seen so far this year. In contrast, manufacturing output growth slowed in the US to register only a modest improvement, with production curbed by the first fall in new orders placed at US factories since December.

However, the manufacturing picture is being distorted by the front-running of tariffs. Having ramped up inventory building in May and June in response to the threat to prices and supply chains posed by higher rate, so-called "reciprocal", tariffs to have been implemented by the US in early July (now pushed out to 1st August), US companies have now reported a halting of this stock building. The July PMI in fact showed inventories of both finished goods and inputs falling in the US. Hence some of the weakness in the July US manufacturing data reflecting the maturing of this inventory adjustment process.

The corollary of reduced US import buying has weakened manufacturing exports and output in Japan, as firms shipped fewer goods to the US, and some slackening of production growth was also evident in the eurozone. However, some tariff front running remained evident, notably from producers in Germany and to a lesser degree the UK, likely linked to persistent concerns over the potential for higher rate US autos tariffs.

Service sector upturn

More encouraging was the picture from the service sectors, where the faster rate of growth in the US was accompanied by upturns in both the eurozone and Japan, which respectively reported the fastest service output growth rates for six and five months respectively. The UK bucked this brighter service sector trend, however, with firms concerned in particular about the dampening impact of higher staffing costs resulting from recent government policy changes.

Despite the cooler expansion seen in the UK, the overall growth rate of service sector activity across the G4 accelerated in July to the fastest since December. It is likely that this in part reflects improving financial conditions, with recent stock market gains and, in many cases lower, lower inflation rates helping fuel more activity.

US sees a third month of steep price rises

While the US led the economic upturn across the G4 in July, it also again reported the highest price pressures. Average prices charged for goods and services in the US rose at a rate just short of May's recent 32-month peak, with firms across both manufacturing and services first and foremost blaming the need to pass higher tariff-related costs onto customers.

In contrast, only modest price growth was recorded in the UK, Japan and the eurozone, the latter reporting an especially subdued rise.

While historical comparisons indicate that the US PMI prices charged index is consistent with consumer price inflation accelerating to around 4% in the coming months, eurozone and UK PMI price gauges are broadly indicative of inflation running close to central bank 2% targets. Japan's rate of price increase is meanwhile indicative of inflation staying elevated above the 2.0% mark in the coming months.

Gloomier outlooks

Inflation worries quelled business optimism about the year ahead in the US, pushing growth expectations further below their long run average to a greater degree than witnessed in the other G4 economies. Only the UK in fact saw businesses grow slightly more confident in July, leading the G4, albeit improving from a low base. Sentiment around the world continued to be subdued in particular by concerns over the destabilizing effect of changing US trade policy.

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

Tel: +44 207 260 2329

chris.williamson@spglobal.com

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Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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