Key Points

  • U.S. manufacturing expanded at its fastest pace since July 2021 this month, with war-related supply concerns pushing new orders to a four-year high, according to data released by S&P Global on Tuesday.
  • Meanwhile, service sector output and new orders grew weakly, which S&P Global said reflected consumer resistance to higher prices and low confidence. Factory layoffs were the largest since 2009, except during the pandemic.
  • "The most concerning aspect is the further decline in manufacturing employment," said Chris Williamson, chief business economist at S&P Global Market Intelligence, in a statement, citing concerns over rising raw material prices and the sustainability of demand. "We remain concerned that factory growth continues to be temporarily boosted by inventory accumulation amid supply concerns."

Deeper Dive

S&P Global said overall U.S. business activity rose for a third consecutive month in June, with its composite index climbing to 52.2 from 51.5 in May, marking a five-month high.

However, S&P Global noted that the pace of growth remained below levels seen before the start of the war with Iran on February 28.

S&P Global also said the June survey "showed a continued divergence in the economy, with sluggish service sector growth while manufacturing expansion becomes increasingly solid."

"Service sector firms frequently cited high prices, rising interest rates, and weak business and consumer confidence," S&P Global said. The service sector accounts for more than 75% of U.S. economic growth (according to data from the St. Louis Fed).

Amid signs of weakness, several economists have lowered their growth forecasts for this year.

The National Association for Business Economics (NABE) said Monday that its panel of economists cut their median forecast for this year's GDP growth to 2% from 2.4% in March.

NABE said these economists' views echoed the S&P Global survey findings, pointing to the damage from the ongoing war to the economic outlook.

"Geopolitical conflict remains the top downside risk," said Yelena Maleyev, senior economist at KPMG, in a statement. Maleyev, who chairs the NABE survey, added: "However, for the first time in over a year, the end of the wars in Ukraine and the Middle East surpassed productivity gains as the top upside risk."

Williamson said the bumpy progress in resolving the Iran war boosted confidence among manufacturers and service providers.

"Positive news regarding the Middle East in June helped U.S. businesses regain some confidence," he said.

But he also noted: "The survey indicates that current output levels are consistent with an annualized economic growth rate of just over 1% in the second quarter."