U.S. and global business activity fell sharply in July, according to surveys of purchasing managers, raising recession risks as countries face high inflation and disruptions from the Ukraine war.
The pullback in U.S. economic activity was particularly dramatic, data firm S&P Global said. Its composite U.S. purchasing managers index fell to 47.5 in July, with a reading below 50 indicating a contraction. The reading—based on survey data from manufacturing and services businesses—reflected a sharp decline from last month, when the index’s rate of expansion was 52.3.
“The downturn in output signaled a further loss of momentum across the economy of a degree not seen outside of Covid-19 lockdowns since 2009,” S&P Global said of the U.S. readings.
The drop in U.S. services activity was particularly sharp, with the biggest fall in output since May 2020—a worrying sign for consumer spending, the engine for U.S. growth.
Rising costs of gasoline, food and rent are prompting consumers to spend more on essentials and pull back on discretionary services spending, according to
chief economist at consulting firm RSM US LLP. “The data point to a deceleration in U.S. economic activity,” he said.
Recent U.S. economic figures show a mixed picture on the state of the economy, fueling an uncertain outlook and growing fears that a recession is looming. Inflation is at a 40-year high, with higher prices eating up a bigger share of spending. A tight labor market has meanwhile shown some signs of loosening, with unemployment claims last week reaching their highest level in eight months.
Demand for goods has cooled this year after a pandemic-related surge, with economists expecting a shift to spending on dining out and travel to help keep the U.S. economy growing.
But Friday’s surveys indicated the U.S. services sector slipped into contraction in July, and that eurozone services activity barely grew.
“The service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook,” said Chris Williamson, chief business economist at S&P Global, which compiles the survey.
S&P Global said its composite Purchasing Managers Index for the eurozone—which measures activity in both the manufacturing and services sectors—fell to 49.4 in July from 52.0 in June, reaching its lowest point in 17 months.
The steepest decline was recorded in Germany, the eurozone’s largest economy, as businesses saw diminished demand.
The eurozone economy has been hit hard by the fallout from Russia’s February invasion of Ukraine, as sharply higher energy and food prices have weakened household spending power and threatened business profit margins. Household and business confidence also has been hit hard by the largest military conflict on the continent for almost eight decades.
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Signs of a global economic slowdown and rampant price pressures have rattled financial markets in recent months, and raised expectations for further action by central banks to rein in inflation.
The European Central Bank raised its key interest rate for the first time in 11 years on Thursday, by a larger-than-expected half-percentage point. It also signaled that further rate rises are likely at coming meetings. U.S. Federal Reserve officials have signaled they are likely to raise interest rates by 0.75 percentage point next week, for the second straight meeting, as part of an aggressive effort to combat high inflation.
For now, the ECB doesn’t expect the currency area to fall into recession, but has acknowledged that possibility if energy costs surge again or Russia halts supplies of natural gas and some rationing is needed.
“Under the baseline scenario there is no recession, neither this year nor next year,” ECB President
told reporters after the rate decision. “Is the horizon clouded? Of course it is.”
Japan’s economy also slowed as manufacturing output fell for the first time in five months while new factory orders declined at the fastest pace since November 2020.
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