Key Points

  • S&P Global said on August 21 that U.S. services and manufacturing showed signs of strengthening this month, further confirming that the economy is gaining momentum after a weak first half.
  • Business activity growth in August was the fastest since 2025, and business outlook confidence improved, but overall business sentiment remained below levels at the start of the year due to concerns over tariffs and government policy changes.
  • Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey data "are consistent with expectations for the economy to expand at a 2.5% annualized rate in the third quarter," compared with growth of just 1.3% in the first half of 2025.

Deeper Dive

A forecast released by the Federal Reserve Bank of Atlanta on August 19 showed that third-quarter gross domestic product (GDP) growth could accelerate to an annualized rate of 2.3%. As economic growth picks up, the labor market remains weak, and businesses may pass on import tariff costs to consumers in the coming weeks.

In fact, persistent signs of inflation and a cooling labor market have put Fed policymakers in a dilemma: they must balance the dual mandate of price stability and maximum employment assigned by Congress, while making trade-offs between the two.

Ahead of the September 16-17 policy meeting, policymakers need to decide whether to hold rates steady to prevent inflation expectations from becoming unanchored, or to cut rates to support the employment outlook. Kansas City Fed President Jeffrey Schmid said in a CNBC interview on August 21: "The credibility of anchoring inflation at 2% is a very important part of the dual mandate. We must carefully consider the impact of lowering short-term interest rates on business and consumer inflation psychology."

Minutes from the Fed's July 30 meeting, released on August 20, showed that "almost all" officials supported keeping the federal funds rate unchanged in the 4.25%-4.5% range. Fed Governors Michelle Bowman and Christopher Waller, however, pointed to signs of labor market weakness and dissented from the decision. Both called for a 25-basis-point rate cut, marking the first time since 1993 that two Fed governors dissented simultaneously.

The S&P survey showed that price pressures may be rising. Williamson said: "Both manufacturing and services firms reported stronger demand conditions, but struggled to meet sales growth, leading to a buildup in backlogs at the fastest pace since early 2022, when pandemic-related capacity constraints were in place." Strong demand "has also strengthened firms' pricing power. Firms are increasingly passing on tariff-related cost increases to customers, indicating that inflation pressures are currently at a three-year high."

Data released last week by the U.S. Bureau of Labor Statistics showed that the producer price index (PPI) rose 0.9% month over month in July and 3.3% year over year, both above expectations and marking the fastest increase in three years. The index measures wholesale selling prices, and tariff costs have begun to pass through the supply chain. Williamson noted that rising goods and services prices signal that consumer prices will run further above the Fed's 2% long-term target in the coming months.

Williamson added: "Given the price increase signals reflected in the survey, based on the historical relationship between these economic indicators and subsequent monetary policy changes, the PMI data lean more toward rate hikes than cuts." However, most traders in the interest rate futures market believe the Fed will ignore signs of rising price pressures and ease monetary policy at next month's meeting. The CME Group's FedWatch tool showed the market pricing in a 73.5% probability of a 25-basis-point rate cut at the September 16-17 meeting.