U.S. Markit Composite PMI Disappoints, Signals Divergent Sectoral Risks

The U.S. economy, long a bastion of resilience, is showing signs of strain. The latest Markit Composite PMI reading for August 2025—, below the expected —marks a softening in growth momentum. While still above the 50 threshold for expansion, the data underscores a critical divergence: industrial sectors like chemical manufacturing are faltering, while consumer finance and services are gaining traction. For investors, this signals a pivotal moment to recalibrate portfolios through strategic sector rotation.

The Industrial Doldrums: Chemical Products in Retreat

The chemical products industry, a cornerstone of U.S. manufacturing, has been hit hardest. August's PMI data reveals a contraction in new orders, production, and employment, with input costs surging due to tariffs and global supply chain bottlenecks. The sector's struggles are emblematic of a broader industrial malaise.

• Tariff-Driven Pain: on raw materials like steel and aluminum have eroded margins, forcing firms to pass costs to consumers. This has stifled demand for chemical products, particularly in construction and automotive sectors.
• Labor Market Woes: Employment in chemical manufacturing has contracted for seven consecutive months, with firms citing “uncertainty over future demand” as a key barrier to hiring.
• Inventory Pressures: While customers' inventories are deemed “too low” by suppliers, this signals weak near-term demand, compounding the sector's challenges.

Consumer Finance: A Tailwind in a Slowing Economy

Contrast this with the consumer finance sector, which is gaining momentum. Despite a slight dip in the Consumer Confidence Index to in August, discretionary spending intentions have rebounded for three consecutive months. The sector's strength is driven by a resilient labor market (unemployment at ) and a shift toward digital banking and credit services.

• Digital Adoption: Firms like Discover Financial Services (DFS) and PayPal (PYPL) are benefiting from a surge in digital transactions, as consumers prioritize convenience and rewards.
• Tariff-Driven Demand: While tariffs have raised costs for goods, they've also spurred demand for consumer finance products. For example, auto loan volumes have ticked up as buyers opt for financing over cash purchases for older vehicles.
• Labor Market Resilience: A tight labor market has kept household incomes stable, supporting creditworthiness and reducing delinquency rates in consumer loans.

Sector Rotation: From Factories to Financials

The divergent trajectories of these sectors present a clear case for rotation. Investors should consider:

1. Underweight Industrial Sectors: Reduce exposure to chemical manufacturing and other tariff-sensitive industries. Focus on companies with strong balance sheets to weather near-term volatility.
2. Overweight Consumer Finance: Allocate capital to firms leveraging digital transformation and benefiting from a stable labor market. ETFs like the Financial Select Sector SPDR (XLF) or individual names like DFS and PYPL could outperform.
3. Hedge Against Inflation: Tariff-driven inflation is a wildcard. Consider adding inflation-protected assets like TIPS or real estate investment trusts (REITs) to offset risks.

The Fed's Dilemma and Market Implications

The 's hands are tied. With core PCE inflation at and a tight labor market, rate cuts remain unlikely. This creates a “Goldilocks” scenario for consumer finance: low rates keep borrowing costs attractive, while inflationary pressures drive demand for credit. Meanwhile, industrial sectors face a double whammy—higher input costs and weaker demand.

Conclusion: Navigating the Divergence

The August PMI reading is a wake-up call. As the economy shifts from industrial-led growth to consumer-driven resilience, investors must adapt. The chemical products sector, while critical to the real economy, is a drag on portfolios. Conversely, consumer finance offers a compelling runway for growth. By rotating into sectors aligned with macro trends—digital adoption, labor market stability, and tariff-driven demand—investors can position themselves to thrive in a slowing but still resilient U.S. economy.