Diverging Paths in U.S. Economic Expansion: Sector-Specific Opportunities and Risks in the PMI Data

The U.S. economy in August 2025 is painting a mixed but intriguing picture. The Markit Composite PMI, a barometer of economic health, hit 55.4, signaling robust expansion. Yet the story isn't uniform across sectors. Manufacturing surged to a 39-month high of 53.3, while services grew at a slightly slower but still impressive 55.4. This divergence creates a unique investment landscape, where sector-specific opportunities and risks demand careful navigation.

Manufacturing: A Resurgent Engine of Growth

The manufacturing sector's rebound is nothing short of remarkable. After a brief contraction in July, the PMI leaped to 53.3 in August, driven by a 39-month high in new orders and a surge in production. Key drivers include energy, technology, and industrials.

• Energy (ENRS): Rising global demand and tariffs have pushed commodity prices higher, creating tailwinds for energy producers. Input costs, while a drag, are being offset by strong pricing power. Energy stocks, particularly those with exposure to oil and gas, are well-positioned to capitalize on this trend.
• Technology (INFT): Automation and AI-driven logistics are reshaping manufacturing. Firms in industrial tech—such as those providing robotics or predictive maintenance software—are seeing demand surge. The sector's historical outperformance during expansions (e.g., the 40.7% peak in Industrials in 2013) suggests further upside.
• Industrials (INDU): Aerospace, machinery, and construction are benefiting from pent-up demand and infrastructure spending. The PMI data aligns with past cycles where industrials outperformed the broader market during growth phases.

Risks to Watch: While manufacturing is thriving, input cost inflation remains a concern. Tariffs are driving up raw material prices, and firms are passing these costs to consumers. Investors should monitor how companies manage margin pressures and whether demand remains resilient amid higher prices.

Services: Strong Growth, But With Lingering Vulnerabilities

The services sector, though slightly slower, continues to expand. The PMI of 55.4 reflects strong new business activity and a surge in backlogs, but input cost inflation and trade tensions are casting shadows.

• Professional Services: Firms in consulting, legal, and IT services are seeing robust demand, driven by corporate reinvestment and digital transformation. However, rising input costs (up 62.3 in August) are squeezing margins.
• Consumer Services: Retail and hospitality are benefiting from strong domestic demand, but foreign customer activity is waning due to U.S. tariffs. This creates a two-speed recovery, with domestic-focused firms outperforming.
• Healthcare and Education: These subsectors are expanding due to demographic trends and policy-driven investments, but they face regulatory and cost pressures.

Risks to Watch: The services sector's reliance on consumer spending makes it vulnerable to inflation and interest rate shifts. Additionally, trade policy uncertainty—particularly the risk of retaliatory tariffs—could disrupt supply chains and input costs. Business confidence dipped to a three-month low in August, signaling caution about future growth.

The Fed's Role and Market Implications

The Federal Reserve's accommodative stance has supported both sectors, but diverging inflationary pressures complicate the outlook. Manufacturing's cost pass-through is more straightforward, while services face sticky input costs. This divergence could delay rate cuts, as the Fed may prioritize inflation control over growth support.

Investors should also consider the labor market. Manufacturing employment hit a 39-month high, while services added the most workers since 2022. However, a recent decline in job openings suggests potential cracks in the labor market, which could influence Fed policy.

Strategic Investment Takeaways

1. Double-Down on Manufacturing Leaders: Energy and industrials offer clear growth trajectories. Look for companies with pricing power and exposure to automation or infrastructure.
2. Hedge Services Sector Risks: While services remain resilient, prioritize firms with strong domestic demand and cost management strategies. Avoid overexposure to sectors with thin margins.
3. Monitor Policy and Tariff Developments: Trade tensions and tariffs are key wild cards. Diversify across sectors to mitigate risks from policy shifts.

In conclusion, the U.S. economy is navigating a complex expansion, with manufacturing and services diverging in both momentum and vulnerability. Investors who align their portfolios with sector-specific strengths while hedging against inflation and policy risks will be best positioned to capitalize on this dynamic environment.