The latest U.S. economic data delivered an encouraging combination for investors Thursday: growth accelerated sharply, hiring strengthened and inflation pressures moderated. The August S&P Global Flash U.S. PMI suggests the economy entered the second half of the third quarter with considerably more momentum than previously expected, complicating the Federal Reserve outlook ahead of next week's PCE inflation report and Federal Reserve Chair Kevin Warsh's Jackson Hole speech.
The headline S&P Global U.S. Composite PMI Output Index jumped to 56.0 in August from 54.5 in July, marking its highest level in 52 months and the strongest pace of business activity growth since April 2022. The acceleration was overwhelmingly driven by services, where the Business Activity Index surged to 56.8 from 54.6, its strongest reading in 20 months.
Manufacturing was considerably less impressive. The Manufacturing PMI slipped to 53.2 from 53.9, while the Manufacturing Output Index fell to 51.9 from 53.9, its weakest reading in 13 months. The divergence suggests that the engine of U.S. growth is shifting back toward services following stronger manufacturing activity earlier this year.
Growth Momentum Is Accelerating
The growth figures are arguably the biggest surprise from the report.
S&P Global said the survey currently points toward annualized third-quarter economic growth approaching 3.0%, compared with the 1.5% pace seen during the second quarter. That represents a meaningful reacceleration and offers little evidence that the economy is slipping toward recession.
Demand also remains healthy. Both manufacturing and services reported solid increases in orders, although momentum has weakened somewhat for manufacturers while strengthening in services. Meanwhile, business expectations improved for a third consecutive month to their highest level since November, supported by stronger order books, customer inquiries, expansion plans and easing concerns surrounding tariffs and the Middle East conflict.
There are some caveats beneath the headline.
Manufacturing production growth slowed for a third consecutive month, inventories weakened and purchases of inputs declined for the first time since February. Supply chains also remain problematic, with delivery times lengthening at one of the sharpest rates of the past four years amid shipping disruptions, tariffs and reduced supplier inventories.
Still, the overall growth message is difficult to characterize as anything other than strong.
Employment Delivers an Important Positive Signal
Perhaps the most important development for the Federal Reserve was employment.
After showing little net change during the previous eight months, employment increased sharply in August, with the PMI survey indicating the strongest payroll growth since January 2025 and the second-largest increase of the past four years.
Services led the improvement, recording its strongest staffing increase since early last year. Manufacturing employment also strengthened, reaching its fastest pace since May. Companies attributed the hiring improvement to stronger confidence in the near-term outlook and healthier order books.
That matters because the labor market has increasingly become a central component of the Fed debate.
A meaningful deterioration in employment would strengthen the case for easier monetary policy even if inflation remained somewhat elevated. The August PMI moves in the opposite direction. Businesses appear to be responding to stronger demand by adding workers rather than preparing for a downturn.
One survey does not settle the labor debate, but the combination of faster output, stronger orders, improving business confidence and accelerating hiring makes the economic backdrop look considerably healthier.
Inflation Provides the Fed Some Relief
The inflation component provides a more dovish counterweight.
Average input costs across manufacturing and services increased at their slowest pace since February, with services cost inflation falling sharply from July's 14-month high and manufacturing input inflation easing for a third consecutive month.
More importantly for the inflation outlook, businesses appear to be passing less of those costs along to customers.
Average prices charged for goods and services increased at their slowest pace since last November, including a ten-month low for services selling-price inflation and a six-month low for manufacturing. Reduced pressure to pass through higher energy costs helped drive the moderation.
That is encouraging ahead of next week's PCE inflation report, but there is an important qualification.
Inflation pressures have cooled, not disappeared.
Input-cost inflation remains elevated by historical standards, with businesses continuing to cite energy prices, supply-chain disruptions and tariffs. S&P Global also noted that the average increase in costs during the third quarter so far remains slightly above the second-quarter pace despite August's improvement.
The Setup for PCE and Warsh
For markets, the report creates an interesting setup ahead of next week's PCE inflation data and Warsh's Jackson Hole speech.
The growth side of the equation looks strong. The labor component improved materially. Neither provides an obvious economic justification for the Fed to rush toward easier policy.
Inflation, however, is moving in a more favorable direction. The particularly encouraging development is the slowdown in selling-price inflation, which suggests businesses are experiencing less need—or perhaps less ability—to pass higher costs through to customers.
That leaves investors with something approaching a strong-growth, cooling-inflation combination.
If next week's PCE report confirms the moderation suggested by the PMI price components, the Fed could gain additional confidence that inflation is moving in the right direction without requiring significant economic weakness. Warsh's interpretation of that combination will therefore be closely watched.
For markets, the message from August PMI is constructive but potentially complicated for rates: the U.S. economy appears to be accelerating rather than weakening, employment is improving, and inflation pressures are finally showing signs of cooling.
That is an attractive economic combination. Whether it is also enough to justify the amount of Fed easing priced into markets may be a very different question.
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U.S. Growth Accelerates as Hiring Rebounds and Inflation Cools Ahead of PCE and Warsh
The latest U.S. economic data delivered an encouraging combination for investors Thursday: growth accelerated sharply, hiring strengthened and inflation pressures moderated. The August S&P Global Flash U.S. PMI suggests the economy entered the second half of the third quarter with considerably more momentum than previously expected, complicating the Federal Reserve outlook ahead of next week's PCE inflation report and Federal Reserve Chair Kevin Warsh's Jackson Hole speech.
The headline S&P Global U.S. Composite PMI Output Index jumped to 56.0 in August from 54.5 in July, marking its highest level in 52 months and the strongest pace of business activity growth since April 2022. The acceleration was overwhelmingly driven by services, where the Business Activity Index surged to 56.8 from 54.6, its strongest reading in 20 months.
Manufacturing was considerably less impressive. The Manufacturing PMI slipped to 53.2 from 53.9, while the Manufacturing Output Index fell to 51.9 from 53.9, its weakest reading in 13 months. The divergence suggests that the engine of U.S. growth is shifting back toward services following stronger manufacturing activity earlier this year.
Growth Momentum Is Accelerating
The growth figures are arguably the biggest surprise from the report.
S&P Global said the survey currently points toward annualized third-quarter economic growth approaching 3.0%, compared with the 1.5% pace seen during the second quarter. That represents a meaningful reacceleration and offers little evidence that the economy is slipping toward recession.
Demand also remains healthy. Both manufacturing and services reported solid increases in orders, although momentum has weakened somewhat for manufacturers while strengthening in services. Meanwhile, business expectations improved for a third consecutive month to their highest level since November, supported by stronger order books, customer inquiries, expansion plans and easing concerns surrounding tariffs and the Middle East conflict.
There are some caveats beneath the headline.
Manufacturing production growth slowed for a third consecutive month, inventories weakened and purchases of inputs declined for the first time since February. Supply chains also remain problematic, with delivery times lengthening at one of the sharpest rates of the past four years amid shipping disruptions, tariffs and reduced supplier inventories.
Still, the overall growth message is difficult to characterize as anything other than strong.
Employment Delivers an Important Positive Signal
Perhaps the most important development for the Federal Reserve was employment.
After showing little net change during the previous eight months, employment increased sharply in August, with the PMI survey indicating the strongest payroll growth since January 2025 and the second-largest increase of the past four years.
Services led the improvement, recording its strongest staffing increase since early last year. Manufacturing employment also strengthened, reaching its fastest pace since May. Companies attributed the hiring improvement to stronger confidence in the near-term outlook and healthier order books.
That matters because the labor market has increasingly become a central component of the Fed debate.
A meaningful deterioration in employment would strengthen the case for easier monetary policy even if inflation remained somewhat elevated. The August PMI moves in the opposite direction. Businesses appear to be responding to stronger demand by adding workers rather than preparing for a downturn.
One survey does not settle the labor debate, but the combination of faster output, stronger orders, improving business confidence and accelerating hiring makes the economic backdrop look considerably healthier.
Inflation Provides the Fed Some Relief
The inflation component provides a more dovish counterweight.
Average input costs across manufacturing and services increased at their slowest pace since February, with services cost inflation falling sharply from July's 14-month high and manufacturing input inflation easing for a third consecutive month.
More importantly for the inflation outlook, businesses appear to be passing less of those costs along to customers.
Average prices charged for goods and services increased at their slowest pace since last November, including a ten-month low for services selling-price inflation and a six-month low for manufacturing. Reduced pressure to pass through higher energy costs helped drive the moderation.
That is encouraging ahead of next week's PCE inflation report, but there is an important qualification.
Inflation pressures have cooled, not disappeared.
Input-cost inflation remains elevated by historical standards, with businesses continuing to cite energy prices, supply-chain disruptions and tariffs. S&P Global also noted that the average increase in costs during the third quarter so far remains slightly above the second-quarter pace despite August's improvement.
The Setup for PCE and Warsh
For markets, the report creates an interesting setup ahead of next week's PCE inflation data and Warsh's Jackson Hole speech.
The growth side of the equation looks strong. The labor component improved materially. Neither provides an obvious economic justification for the Fed to rush toward easier policy.
Inflation, however, is moving in a more favorable direction. The particularly encouraging development is the slowdown in selling-price inflation, which suggests businesses are experiencing less need—or perhaps less ability—to pass higher costs through to customers.
That leaves investors with something approaching a strong-growth, cooling-inflation combination.
If next week's PCE report confirms the moderation suggested by the PMI price components, the Fed could gain additional confidence that inflation is moving in the right direction without requiring significant economic weakness. Warsh's interpretation of that combination will therefore be closely watched.
For markets, the message from August PMI is constructive but potentially complicated for rates: the U.S. economy appears to be accelerating rather than weakening, employment is improving, and inflation pressures are finally showing signs of cooling.
That is an attractive economic combination. Whether it is also enough to justify the amount of Fed easing priced into markets may be a very different question.
Read full article here »