US Flash PMI for July Shows Strong Services Growth, Weak Manufacturing, and Renewed Inflation Risks

US business activity picked up sharply in July, according to S&P Global’s Flash PMI report, but the strength came with caveats. While services activity surged to a seven-month high, manufacturing unexpectedly contracted, reflecting a growing divergence between sectors. The report also flagged intensifying inflationary pressures—particularly tied to tariffs—alongside waning business confidence and uneven job gains.

WATCH: Bob Elliott: Markets Are Delusional — And Credit Knows It

The S&P Global Composite PMI rose to 54.6 in July from 52.9 in June, the strongest monthly expansion in 2025 so far. That strength came overwhelmingly from services, where the Business Activity Index rose to 55.2 (vs. 53.0 expected and 52.9 in June), suggesting robust demand from households and businesses. In contrast, the Manufacturing PMI dropped sharply to 49.5 (vs. 52.7 expected and 52.9 prior), marking the first contraction in factory activity this year and a seven-month low.

This bifurcation signals an economy leaning heavily on services, with manufacturing losing momentum. S&P Global Chief Economist Chris Williamson noted, “Growth was worryingly uneven and overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year, the latter linked to a fading boost from tariff front-running.” That manufacturing slowdown came despite continued production gains, as new factory orders fell modestly for the first time in 2025.

New business trends echoed that divide. Total new orders grew at the same pace as May, with a pickup in services offsetting factory softness. Domestic demand appeared healthy, but exports declined for the third time in four months, with July's fall being the steepest since April. Firms cited tariffs, rising input prices, and macro uncertainty as major culprits depressing international demand—particularly in manufacturing.

Inflation, a perennial concern for the Federal Reserve, also reared its head. Input cost inflation accelerated across both services and manufacturing, with price hikes blamed primarily on tariffs but also on wage pressures tied to labor shortages. Notably, close to two-thirds of manufacturers and 40% of services firms citing higher selling prices linked those hikes directly to tariffs. The resulting jump in prices charged for goods and services marked one of the largest monthly increases since 2022.

Manufacturers, in particular, reported significant cost burdens. Although factory gate inflation eased from June’s highs, it remained elevated, registering the second-largest increase since November 2022. Meanwhile, services firms posted their fastest rise in output prices since April 2023. These trends suggest that core inflation may rise further above the Fed’s 2% target in the coming months.

On the labor front, the report was mixed. Total employment rose for a fifth straight month, driven by backlogs and expanding demand in services. Services providers added staff at the fastest pace since January as unfilled orders surged to a three-year high. However, the story was less upbeat in manufacturing. Factory employment fell for the first time in three months, with producers cutting back amid weaker orders and declining backlogs.

Inventory management trends further confirmed a shift in momentum. Manufacturers had built inventories aggressively in May and June in anticipation of tariff hikes, but in July, they reduced both raw material and finished goods stockpiles. Input purchases also slowed significantly, pointing to more conservative supply chain planning. Supplier delivery times improved sharply, another sign of reduced stress in factory logistics—and one that pulled the PMI headline figure lower as a technical matter.

Business sentiment deteriorated again in July, with expectations for future output falling for the second consecutive month and hitting their lowest level since early 2023. Concerns over tariffs and federal spending cuts weighed heavily on both manufacturers and services firms. Despite stronger current activity, firms appeared wary about the sustainability of demand amid a more challenging policy environment.

S&P Global estimates that the current data implies a 2.3% annualized GDP growth rate for Q3, a strong acceleration from the 1.3% rate signaled by Q2 surveys. However, the uneven nature of that growth—propped up largely by services—could be a risk if the services sector starts to weaken or if inflation pressures trigger further policy tightening. As Williamson concluded, “Whether this growth can be sustained is by no means assured.”

With the final PMI data due in early August, markets will watch closely for confirmation of these early trends. For now, the July flash report sends a mixed message: resilient demand in services, but rising inflation risks and renewed fragility in manufacturing—leaving the Fed and investors alike with more questions than answers.