U.S. business activity climbed to an eight-month high in July, driven by World Cup spending and holiday celebrations, but economists warn the uptick won't last as Middle East conflict disrupts supply chains and pushes oil prices toward $100 a barrel.
S&P Global's flash services Purchasing Managers' Index jumped to 53.6, the strongest reading since November, from 51.2 in June. The Composite Output Index reached 53.6, also an eight-month high, up from 51.9 last month. Manufacturing PMI edged down slightly to 53.8 from 53.9 in June. All readings remained above the 50-mark threshold that signals expansion.
The services sector outperformed expectations. Economists polled by Reuters had forecast the services PMI to rise only to 51.5, while manufacturing was expected to climb to 54.3. New services business grew at the fastest pace since November, though new order growth for factory goods slipped to a four-month low.
Short-Lived Boost
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the data were consistent with gross domestic product expanding at a 2.0% pace so far in the current quarter. That matches the first-quarter pace of 2.1% and aligns with preliminary estimates for second-quarter GDP, which the government will deliver next week.
But Williamson cautioned against reading too much into July's numbers. "Some of this improvement may prove short-lived as July saw hospitality spend boosted by the FIFA World Cup and USA 250 anniversary activities," he said. Employment expanded modestly in both sectors, suggesting businesses aren't yet confident enough to ramp up hiring.
Supply Chain Pressures Return
The manufacturing slowdown reflects a more troubling trend. "It was worrying – though not unexpected – to see manufacturing growth weaken as some of the stock building seen in prior months showed signs of fading," Williamson said. "Instead, July saw a concerning intensification of supply chain delays and accompanying renewed upturn in price pressures, constraining growth and subduing demand."
The U.S.-Israeli-led war with Iran has reignited those pressures. The recent resumption of air strikes against and by Iran shut down traffic in the critical Strait of Hormuz, pushing global benchmark oil prices back near $100 a barrel from around $70 at the start of this month. Average U.S. gasoline prices have climbed back above $4 a gallon.
Williamson warned that recent developments in the Middle East "will have only further exacerbated these supply chain and price worries and raise downside risks to the near-term outlook for the economy, hinting that July's upturn may not be the start of an improving trend."
Manufacturers had engaged in precautionary stock building in recent months as the conflict escalated. That buffer now appears to be slowing, leaving businesses more exposed to ongoing disruptions. The combination of supply chain delays and rising input costs threatens to squeeze profit margins and dampen consumer demand just as the economy showed signs of momentum.
Why This Matters:
July's business activity surge looks less like sustainable growth and more like a temporary boost from one-time events. The World Cup and Independence Day celebrations won't repeat next month, and the underlying economic fundamentals reveal mounting challenges. Oil prices have surged 43% since early July due to Iran conflict disruptions, directly hitting consumers at the pump and businesses throughout the supply chain. Manufacturing's reliance on precautionary stockpiling rather than genuine demand growth signals business uncertainty about the economic outlook. When companies stop building inventory, it typically means they're bracing for weaker sales ahead. The return of supply chain pressures and price increases threatens to reignite inflation concerns just as the economy needs stability. For businesses and consumers alike, the combination of geopolitical risk and rising costs creates an environment where short-term gains can quickly evaporate.