U.S. private sector activity displayed stronger-than-anticipated growth in July, driven primarily by a robust services sector, despite manufacturing slipping into contraction for the first time in six months.

The preliminary Composite Purchasing Managers' Index (PMI) edged up from 54.8 in June to 55 in July, reaching its highest level since April 2022.

Services PMI increased from 55.3 to 56, surpassing expectations of 55 and marking a 28-month high.

Conversely, the Manufacturing PMI fell from 51.6 to 49.7, missing the anticipated 51.7 and returning to contractionary territory after two months of expansion.

Key Highlights From July PMI Reports

• The service sector has outperformed manufacturing for the fourth consecutive month, with the divergence between the two sectors widening to its largest since June of the previous year.
• Employment growth slowed, while business confidence declined for the second month, partly due to rising political uncertainty ahead of the presidential election.
• Declines in new orders, production, and inventories contributed to the dip in the Manufacturing PMI.
• Good news came from inflation. Average prices for goods and services rose at the slowest rate since January, and the second-slowest rate since October 2020. Service prices increased at their slowest pace in almost four years.
• Despite this, firms reported higher prices for various raw materials, with energy and logistics prices rising, partly due to increased freight and shipping rates.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said, "The flash PMI data signal a 'Goldilocks' scenario at the start of the third quarter, with the economy growing at a robust pace while inflation moderates."

Williamson noted that output across manufacturing and services expanded at the strongest rate in over two years in July, with survey data suggesting GDP is rising at an annualized rate of 2.5%, following a 2.0% gain in the second quarter.

The economist welcomed the moderation in price increases, indicating that the rate of increase of average prices charged for goods and services has slowed further, aligning with the Fed's 2% target.

However, he also expressed concern over the uneven nature of growth, noting that while the service sector gains strength, manufacturing is contracting. Furthermore, he stressed that both manufacturers and service providers are experiencing heightened uncertainty due to the upcoming election.

The July survey also noted rising input costs, driven by higher raw material, shipping, and labor costs.

"These higher costs could feed through to higher selling prices if sustained, or cause a squeeze on margins," he said.

Market Reactions

The S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust (SPY  ), extended its declines for the session, down 1.5% by 10:15 a.m. in New York.

Tesla Inc. (TSLA  ) was the worst performer among mega caps, down over 11%, on track for its largest 1-day drop since late January 2024. Chipmakers resumed the selloff, with Nvidia Corp. (NVDA  ) down over 3%.

The tech-heavy Nasdaq 100, as replicated by the Invesco QQQ Trust (QQQ  ), fell 2.2%.

Small caps, as monitored through the iShares Russell 2000 ETF (IWM  ), eased 0.8%.