US Flash PMI Data: Manufacturing Contracts while Services Remain in Expansion

The Flash Purchasing Managers' Index (PMI) data for the United States in June indicates a mixed economic landscape.

As per the S&P Global Flash US PMI Composite Output Index, the overall business activity continues to expand, albeit at a slower pace, weighed down by the renewed contraction in the manufacturing sector.

On the other hand, the services sector remains a bright spot, continuing to record robust growth, though the rate of expansion has cooled from the 13-month high of May. This cooling may be an ongoing theme that’s worth watching ahead of any potential contraction. There have been increasing signs of layoffs within parts of the services industry recently.

The composite output index for June stood at 53.0, marking a fifth successive monthly increase in activity across the private sector. This figure, however, is a dip from the 54.3 seen in May and signals the slowest upturn in output since March. The overall rate of expansion of business activity in the US remained robust in June, consistent with GDP rising at a rate of 1.7% to put second quarter growth in the region of 2%.

Manufacturing Sector's Downturn

The manufacturing sector turned out to be a drag on the overall expansion. Goods producers recorded a solid decline in production after three months of growth, with the Factory Production Index falling at the steepest rate since January.

The S&P Global Flash US Manufacturing PMI posted 46.3 in June, down from 48.4 in May, signaling a sharper deterioration in operating conditions across the manufacturing sector. This decline in the health of the sector was the most severe in 2023 to date and stemmed from a marked reduction in new orders.

Manufacturers reported the fastest rate of contraction in new orders since December 2022, with weak demand linked to muted customer confidence. Some firms also noted that sufficient stock levels at clients had led to lower new orders. Similarly, foreign client demand remained subdued. Although easing from that seen in May, the pace of contraction in new export orders was steep overall.

At MacroVisor we’ve been talking about how consumers pulling back from spending on merchandise and other discretionary goods has left an inventory overhang which could limit new orders. We’re certainly continuing to see that theme play out in today’s data.

Inflationary pressures also continued to dwindle across the manufacturing sector, as suppliers sought to boost their sales and offer reduced prices. The pace at which input prices fell was the quickest since May 2020.

Generally speaking, when prices begin to fall because there’s an effort to attract sales, this is a sign of a weakening economic picture. We’re certainly seeing it in goods, but not yet in services.

Services Sector Continues to Expand

In contrast to the manufacturing sector, robust growth continued to be recorded in the service sector. The S&P Global Flash US Services Business Activity Index indicated a further solid expansion in output at services firms in June, driven by strong customer confidence and new client acquisitions. The index stood at 54.1, slightly down from the 54.9 in May, but marking the second-fastest growth rate since April 2022​.

Demand conditions at service providers remained robust, with new orders increasing at a strong rate in June. Firms noted a greater inclination to spend among customers, with client referrals also rising. The pace of expansion was broadly in line with May’s 13-month high. New export orders also rose, signalling back-to-back monthly increases in external client demand.

However, challenges persist in the service sector. Service sector firms registered a quicker rise in input prices at the end of the second quarter, driven primarily by increased wage bills. Despite the rising cost pressures, companies sought to remain competitive and drive sales, which led to a slower uptick in output charges during June.

Global Flash PMI Shows Further Slowing

Japan slipped into contraction, as did France. Elsewhere we saw Germany and EU slow their expansion meaningfully to just marginal levels. The UK and US showed slowing growth, but were the strongest readings in the list.

Weakness was most noteworthy in global manufacturing, where every reading showed contraction. Services remained resilient, but showed signs of slowing.

Looking Ahead

The pace of employment growth eased to the softest since January, reflecting a combination of lower demand for staff and poor candidate availability.

The contraction in manufacturing intensifying is a concern, and something to continue to monitor as we just saw a 14th month in a row of negative LEIs pointing toward a recessionary environment.

Services will be the most important area to watch now for signs of weakness. We believe that services are likely to begin to roll over after Q3, and that will lead to unemployment rising and recession risks meaningfully increasing.