Key Points

  • S&P Global said on Friday that U.S. business activity and confidence rose to an eight-month high in July, prompting companies to increase hiring for the first time in three years.
  • S&P Global noted that the services sector was the main driver of growth, while manufacturing growth slowed; supplier delivery delays rose to the highest in nearly four years due to the conflict with Iran, and input cost inflation hit a 14-month high.
  • "Supply chain delays intensified notably in July, accompanied by renewed price pressures, constraining growth and dampening demand," said Chris Williamson, chief business economist at S&P Global, in a statement. "Recent events in the Middle East will only intensify these supply chain and price concerns further and raise the downside risks to the near-term economic outlook, suggesting that the July upturn may not mark the start of an improving trend."

Deeper Dive

S&P Global's latest purchasing managers survey indicates that U.S. GDP growth in the current quarter could accelerate to 2% from 1.2% in the second quarter, Williamson said.

"However, some of the improvement may be difficult to sustain, as July spending on hotels and restaurants was boosted by the World Cup and celebrations of the 250th anniversary of the founding of the United States," he said. "Also concerning—though not surprising—was the weakening in manufacturing growth, as some of the inventory built up in previous months showed signs of fading."

Despite a surge in oil prices earlier this month due to the resumption of conflict in the Persian Gulf, the economy has shown notable resilience, said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

"However, we expect cracks to appear soon, as households are no longer receiving unusually large tax refunds, and the energy shock is intensifying again," Allen said.

Since July 2, global benchmark Brent crude oil futures have risen 36%, from $70.85 per barrel to $96.62 per barrel.

Allen predicts that households will feel the pressure from rising energy prices this quarter.

In fact, S&P Global said that rising fuel costs this month pushed selling prices up at the fastest pace in nearly four years.

"Consumer prices may see several consecutive months of significant increases in the third quarter, as some cost pressures related to the energy shock will be passed through," Allen said. "But in the near term, the likelihood of a sustained sharp rise in core goods inflation remains low."

S&P Global said domestic demand drove growth in both the services and manufacturing sectors this month, while exports of goods and services declined.

In addition to the World Cup and July 4th celebrations, increased investment in sales, marketing, and product development also drove growth, S&P Global said.

"Manufacturers again reported precautionary inventory accumulation due to concerns about prices and supply availability related to the Middle East war, although fewer such reports partly explained the slowdown in manufacturing growth," S&P Global said.

S&P Global said manufacturer optimism fell to its lowest level since last October, "reflecting weak demand growth, global trade concerns, geopolitical uncertainty, tariffs, and high costs."