The US economy continues to show signs of resilient growth while inflation pressures subside.
Business activity grew at its fastest pace in 27 months during July, according to the latest S&P Global flash US composite PMI.
The composite PMI, which captures activity in both the services and manufacturing sectors, came in at 55 in July, up from 54.8 in June. Economists had expected the index to tick lower to 54.2.
Importantly, the surprise growth in activity came alongside lower price increases. Average prices charged for goods and services rose at the slowest rate since January and the second-slowest rate since October 2020, according to S&P Global's report.
“The flash PMI data signal a ‘Goldilocks’ scenario at the start of the third quarter, with the economy growing at a robust pace while inflation moderates," Chris Williamson, chief business economist at S&P Global Market Intelligence, said in the release.
Wednesday's release is the latest in a string of data points that have investors increasingly confident the Federal Reserve will cut interest rates before a deterioration in the US economy, keeping the vaunted "soft landing" outcome to the Fed's hiking cycle in sight.
As of Wednesday morning, investors were pricing in a 100% chance the Fed cuts rates in September, per the CME FedWatch tool.
Services drove the gains in the composite index, with the index rising to a reading of 56, its highest in 28 months. Meanwhile, activity in the manufacturing sector declined, hitting a reading of 49.5, its lowest print in seven months.
Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.
"Growth has become worryingly skewed, with manufacturing slipping back into contraction as the service sector gains further strength," Williamson said. "Some of the production decline was linked to staff shortages, so could prove temporary — something which is supported by the sector reporting improved confidence about future growth prospects."
Broadly, Williamson reasons that the metrics are still strong enough to translate to solid economic growth in the third quarter. Willamson noted that output across manufacturing and services is expanding at "the strongest rate for over two years in July." This points to the economy growing at a 2.5% annualized rate in the third quarter, Williamson noted.
The first reading of second quarter Gross Domestic Product (GDP) is expected on Thursday morning. Economists project the US economy grew at an annualized rate of 2% in the second quarter.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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