August PMIs push narrative of a manufacturing slow down, adding to dovish expectations for Powell's speech

The August U.S. PMI survey results reveal a mixed picture for the economy, with significant differences between the performance of the manufacturing and services sectors. The Composite PMI Output Index edged down slightly to 54.1, a four-month low, signaling continued but slowing economic growth. The Services Business Activity Index rose to 55.2, marking a two-month high, while the Manufacturing Output Index dropped sharply to 47.8, its lowest level in 14 months. The Manufacturing PMI also declined to 48.0, an eight-month low, indicating a deeper contraction in the manufacturing sector.

The news aligns with previous survey comments and does not alter the prevailing narrative, making it unlikely to influence Fed Chair Jerome Powell's tone at tomorrow's Jackson Hole speech.

On the inflation front, there were some positive signs as prices charged for goods and services rose at their slowest rate since June 2020, with the overall inflation rate now close to pre-pandemic levels. However, input cost inflation remained elevated, particularly in the manufacturing sector, where it accelerated to its highest level since May. This persistent cost pressure suggests that inflationary challenges are far from over, even as price increases at the consumer level begin to normalize.

Business activity showed a growing divergence between sectors. The service sector continued to expand robustly, supported by strong demand, while manufacturing output contracted at the fastest pace since June 2023. New orders in manufacturing fell for the second consecutive month, indicating weakening demand, while service sector orders saw one of the strongest increases in the past 14 months. Despite the solid growth in services, both sectors reported declining export orders, with manufacturing experiencing the largest drop in 12 months.

Employment trends also highlighted the sectoral divergence. Overall employment fell in August, marking the softest payroll growth since early 2020. The manufacturing sector saw a near-stalling of job growth due to concerns about the business outlook, while the service sector faced hiring difficulties, leading to a reduction in payroll numbers. This cooling in the job market raises concerns about the sustainability of the current growth trajectory.

Looking ahead, survey participants expressed cautious optimism about the economic outlook. While sentiment in the service sector improved due to investments in new products and marketing, confidence in manufacturing remained subdued, reflecting worries about future demand and the potential impact of the upcoming Presidential Election. The overall outlook is clouded by these uncertainties, particularly in manufacturing, which is often seen as a leading indicator of broader economic trends.

In summary, the August U.S. PMI survey paints a picture of an economy that is growing but facing significant headwinds. The service sector continues to drive overall growth, but the manufacturing sector is struggling, with declining output and demand. Inflation pressures are easing, but input costs remain high, complicating the policy landscape and raising questions about the sustainability of the current expansion.