Business activity in the U.S. grew at a moderate pace in July for the second consecutive month, suggesting economic cooling in what was predicted to be a hotter quarter.
As Reuters reported on Friday (July 23), the U.S. Composite PMI Output Index, which looks at the manufacturing and services sectors, dropped to a four-month low of 59.7 from 63.7 last month. Readings above 50 show private sector growth.
“Businesses are battling shortages of raw materials and labor, which are fanning inflation, in the aftermath of the economy’s reopening after severe disruptions caused by the COVID-19 pandemic,” the report noted. “The survey’s findings fit in with economists’ views that growth will slow after accelerating in the second quarter, thanks to massive fiscal stimulus.”
While the boost the economy enjoyed from stimulus funding may be fading, demand remains strong, with households racking up at least $2.5 trillion in savings during the pandemic. Meanwhile, the labor market is recovering, with wages rising as companies compete to attract employees. These factors have helped support the economy, but new COVID infections caused by the Delta variant of the virus could lead to more consumer caution.
“While the second quarter may therefore represent a peaking in the pace of economic growth according to the PMI, the third quarter is still looking encouragingly strong,” said Chris Williamson, chief business economist at IHS Markit, which released the PMI Output Index. “Short-term capacity issues remain a concern, constraining output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply,” he added.
There have been other signs of a slowing economy in recent weeks. In June, PYMNTS reported on a decline in applications for new businesses in the U.S., with the Commerce Department reporting a 9.8 drop for the month. And a report from The Wall Street Journal earlier this week finds that economists predict some slowdown following more steady growth for the next year, with new job gains and people spending the money they saved during lockdown. After that, economists predict a cooling period that looks like pre-pandemic life.
“We’ve moved into the more moderate phase of expansion,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. “We’re past the peak for growth, but that doesn’t mean something more sinister is going on here and that we’re poised to then drop off sharply.”