US business activity slowed to a five-month low in July, dragged down by decelerating service-sector growth, closely watched survey data showed, but falling input prices and slowed hiring indicate the Federal Reserve could be making progress on important fronts in its bid to reduce inflation.
S&P Global said its flash US Composite PMI index, which tracks manufacturing and service sectors, fell to a reading of 52 in July from 53.2 in June. July's reading showed the sixth straight month of growth but was restrained by softening conditions in the service sector. Readings above 50 indicate expansion.
Monday's tepid survey data supported evidence that the US economy was still growing as the third quarter began, but at a slower rate from the April-through-June period.
"The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That's down from a 2% pace signaled by the survey in the second quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The slowdown may be viewed positively at the Fed, which is keen to see activity cool to lower inflation. On Wednesday policymakers are expected to raise interest rates by a quarter percentage point, to between 5.25% and 5.5%, in what many investors and economists see as potentially their last increase of the current cycle.
Overall, GDP is still heavily reliant on growth in the service sector as manufacturing contracts, but the report showed an increasing dependence on international demand as new export orders for services reached the highest levels since May 2022. The increase in foreign demand was due to a weakening US dollar.
The services activity index fell to 52.4 from 54.4 in June and was weaker than the reading of 54 expected among economists in a Reuters poll.
The survey's manufacturing output index, meanwhile, experienced growth for the first time in two months, rising to 50.2 from a contracting rate of 46.9 in June. The broader manufacturing PMI index was improved but still in contraction territory at 49 versus 46.3 last month and topped economists' forecast for 46.2.
