U.S. services-sector activity surged to an eight-month high in July, driven largely by temporary spending around the FIFA World Cup and Independence Day celebrations, but economists warn the uptick won't last as supply chain disruptions and soaring energy costs threaten to squeeze both businesses and consumers in the months ahead.
S&P Global's flash services Purchasing Managers' Index jumped to 53.6, the strongest reading since November, up from 51.2 in June. The Composite Output Index climbed to 53.6 from 51.9 last month. Manufacturing growth, however, slowed to 53.8 from 53.9 in June as companies pulled back on precautionary stock building amid the ongoing U.S.-Israeli-led war with Iran. Readings above 50 indicate expansion.
Temporary Boost Hides Deeper Concerns
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 July-September period. The government will deliver its first estimate of second-quarter GDP next week, and a preliminary sample of economists polled by Reuters sees growth holding steady at 2.0%, roughly on par with the first-quarter pace of 2.1%.
But Williamson cautioned that "some of this improvement may prove short-lived as July saw hospitality spend boosted by the FIFA World Cup and USA 250 anniversary activities." New services business grew at the fastest pace since November, while new order growth for factory goods slipped to a four-month low. Employment expanded modestly in both sectors.
War Disrupts Supply Chains, Drives Up Costs
The manufacturing slowdown reflects a troubling reality for working families and small businesses: supply chain delays are intensifying again, and prices are climbing. Williamson said 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." He added that "July saw a concerning intensification of supply chain delays and accompanying renewed upturn in price pressures, constraining growth and subduing demand."
The recent resumption of air strikes against and by Iran had again 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 July. Average U.S. gasoline prices have climbed back above $4 a gallon, hitting household budgets just as inflation had begun to ease.
Economists polled by Reuters had expected the services PMI to rise to 51.5 and the manufacturing PMI to increase to 54.3, suggesting the services surge exceeded forecasts while manufacturing underperformed.
Near-Term Outlook Darkens
Williamson warned that "events over recent days 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." U.S. businesses reported a good start to the third quarter, he said, but the foundation looks shaky.
Why This Matters:
The July business activity bump offers little comfort for households already stretched thin by years of elevated prices. While corporate earnings may reflect short-term gains from World Cup spending, working families face renewed pressure at the pump and the grocery store as supply chain disruptions drive costs higher. The manufacturing slowdown signals that businesses are pulling back on investment amid uncertainty, which typically leads to slower job growth and wage stagnation. Most concerning is the return of price pressures just as inflation had begun to moderate—a pattern that disproportionately harms lower- and middle-income Americans who spend a larger share of their budgets on essentials like fuel and food. Without coordinated international action to stabilize energy markets and protect critical shipping lanes, the economic pain will continue to fall heaviest on those least able to absorb it.