U.S. business activity shrinks further in July - IHS Markit data shows

U.S. business activity has lost momentum in July as the services sector cooled amid supply constraints after what was expected to have been a strong second quarter.

The manufacturing and services industry tracker, Flash U.S. Composite PMI Output Index, fell to a four-month low of 59.7 in July from 63.7 in the previous month, data firm IHS Markit said on Friday.

A reading above 50 indicates growth in the private sector.

Although the output growth rate was the slowest for four months, it is the fastest recorded in the firm’s 14-year survey.

Businesses are battling shortages of labor and raw material after the reopening of the economy, which was disrupted by the COVID-19 pandemic.

The economists are also foreseeing a slower growth after the second quarter, accelerated by the massive fiscal stimulus.

Currently, the economy is supported by robust demand as households have accumulated at least $2.5 trillion in excess savings during the pandemic.

But the resurging Delta variant induced COVID-19 is infecting many parts of the country, and with low vaccination rates, consumers are more cautious.

“While the second quarter may therefore represent a peaking in the pace of economic growth according to the PMI, the third quarter is still looking encouragingly strong,” said Chris Williamson, the chief business economist at IHS Markit.

“Short-term capacity issues remain a concern, constraining output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply.”

All eyes are on the upcoming snapshot of the GDP for the second quarter due next Thursday, which grew at a 6.4% pace in the previous quarter.

The IHS Markit’s survey showed that services sector PMI fell to five months low to 59.8 from 64.6 in June.

The survey said some firms reported customer hesitancy because of significant hikes in selling prices caused by a slowdown due to labor shortages and raw materials.

Although the services sector is cooling down, manufacturing continues to power ahead. The flash manufacturing PMI rose to an all-time high of 63.1 from 62.1 in June.

A measure of new orders received by factories increased, and manufacturers reported unfinished work continued to pile up even as hiring picked up. Suppliers continued to struggle to deliver inputs on time.

Williamson said the fear from Delta variant could cause a drop ain confidence which in turn can “feed through to reduced spending, investment and hiring, adding to the possibility that growth could slow further in coming months.”

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