U.S. business activity contracts in July for first time in 2 years, survey finds

(Reuters) – Business activity in the United States contracted for the first time in nearly two years in July as a sharp slowdown in the services sector offset continued modest growth in manufacturing, brushing a a grim picture of an economy held back by high inflation, rising interest rates and deteriorating consumer confidence.

S&P Global said on Friday its preliminary — or “flash — — U.S. composite PMI production index fell far more than expected to 47.5 this month from a final reading of 52.3 in June. With a reading below 50 indicating that business activity had contracted, it’s a development likely to fuel heated debate over whether the US economy is back – or close to – d a recession after rebounding strongly from the slowdown in early 2020 at the onset of the covid19 pandemic.

July’s fall marked the fourth consecutive monthly decline and was largely due to pronounced weakness in the services sector index, which fell to the lowest since May 2020 at 47.0 from 52.7 a month earlier. . This was enough to offset the relative stability of manufacturing, with the group’s factory activity index down slightly to 52.3 from 52.7, indicating that the sector was still growing but maintaining its pace the lower since July 2020.

Economists polled by Reuters had a median estimate for the services sector index at 52.6, while the manufacturing index was estimated at 52.0.

“Preliminary PMI data for July points to a worrying deterioration in the economy,” Chris Williamson, chief economist at S&P Global Business, said in a statement. “Excluding the pandemic-related months of lockdown, production is falling at a rate not seen since 2009 amid the global financial crisis.”

S&P Global’s measures of new orders in the manufacturing sector, bumper business in the services sector and future expectations in both fell to levels not seen since the first year of the pandemic.

The report was the latest in a series of economic indicators that have “surprised” on the downside of economists’ expectations and fueled concern from Wall Street to Main Street about whether the economy is stagnating. Citigroup’s U.S. economic surprise index last month recorded its lowest level since May 2020 and has remained negative so far in July.

Data from S&P Global indicates that US gross domestic product is falling at an annualized rate of about 1%, Williamson said. The economy contracted at a rate of 1.6% in the first quarter, largely due to problems with business inventory management, and the government will provide its first reading of production in the second quarter next week, which according to some models will show a second contraction in a row.

The report also painted the picture of a decelerating jobs scene, which so far has defied expectations of a noticeable slowdown, with unemployment still near a half-century low. S&P Global said its manufacturing employment index fell to the lowest since July 2020 while employment in services recorded its weakest growth since February.

On Thursday, the Labor Department reported that new jobless claims had reached their highest level since November last week and that, a week earlier, the total number of people receiving unemployment assistance had reached its highest level since April. That said, both remain below historical standards.

(Reporting by Dan Burns; Editing by Andrea Ricci)