US business activity accelerated to a five-month high in June, led by manufacturing but weak services growth, falling factory employment, and subdued confidence tempered the otherwise encouraging headline figures.
U.S. private-sector activity accelerated more than expected in June, undermining hopes for a softer economic backdrop that could have strengthened the case for Fed rate cuts. Flash estimates released by S&P Global on Tuesday showed both manufacturing and services purchasing managers’ indices (PMI) expanding much more than expected.
The major U.S. indices, which traded with steep losses ahead of the data, trimmed a fraction of the losses, although staying deep in the red. Bond yields fell, while the U.S. dollar strengthened past the 101 handle.
Crunching the Headline Numbers
Does the latest data back building evidence that the U.S. economy has weathered the macro and geopolitical challenges fairly well? At least the headline numbers confirm the economy’s resilience.
U.S. business activity expanded for a third straight month in June, accelerating from the pace seen in May. The rate of expansion, however, decelerated from the pace seen at the start of the year before the onset of the U.S.-Iran conflict.
- The June flash composite PMI rose to 52.2 from May’s 51.5, with the pace of expansion fastest in five months.
- The flash manufacturing PMI edged up 0.6 points to a 49-month high of 55.7 from 55.1 in the previous month. The June reading also outpaced the consensus estimate of 54.6.
- The flash services business activity PMI rose to a four-month high of 51.3, up from 50.7 in May, and exceeding the consensus of 51.1.
Importantly, both surveys remain comfortably above the 50 threshold that separates expansion from contraction. The manufacturing reading is particularly notable given that the sector spent much of the post-pandemic period lagging services and flirting with contraction.
Does the inner details of the report corroborate the positivity?
S&P Global pointed to a bifurcation of the economy, with sluggish service sector growth contrasting with an increasingly solid manufacturing expansion. Factory business conditions have now continued to improve since August 2025, with the rate of expansion improving steadily since February.
The PMI data also align with a recent run of resilient economic indicators, including steady payroll growth, healthy retail spending, and a labor market that, while cooling, remains far from recessionary territory. Taken together, the data continue to challenge predictions of an imminent economic slowdown.
Manufacturing Expanded — At What Expense?
Precautionary stockbuilding yet again beefed up manufacturing activity, although partly, as the industry witnessed widespread supply issues. Some of the increase also had to do with manufacturers rushing to capitalize on the price hikes associated with the war.
While inventory accumulation can support growth in the short term, it also raises questions about the sustainability of current manufacturing strength. If demand fails to keep pace, businesses could eventually be forced to work through excess inventories, creating a future drag on production.
The manufacturing output index surged higher to a 59-month high of 55.7, up from May’s 55.1. The sharp increase in output was a function of the biggest increase in new orders in over four years.
Factories bought inputs at the fastest pace since September 2021, and inventories accumulated at the fastest pace ever, barring the 2025 tariff announcement-related spike.
On the other hand, employment witnessed the sharpest fall since May 2020. The survey found that companies continued to focus on cost reduction to withstand the impact of rising input prices and the softening outlook.
The divergence between rising output and falling employment suggests companies are prioritizing productivity gains and margin protection over workforce expansion, a trend that has become increasingly common amid persistent cost pressures.
Manufacturing input cost inflation eased from May peak, although the June reading was the second highest for almost four years.
Services — A Sore Spot?
The rise in the service sector activity in June came about due to a modest increase in both output and new orders. Some of the upside was related to the ongoing soccer World Cup, co-hosted by the U.S.
Given that services account for roughly two-thirds of U.S. economic activity, the sector's inability to generate stronger momentum remains a key reason economists remain cautious despite the recent improvement in manufacturing
Service providers, however, lamented about elevated prices, higher interest rates and low confidence among businesses and consumers. However, service job cuts were only modest. Services input costs inflation edged up to a six-month high in June.
Outlook Improves but Stays Below Trend
Companies’ expectations for output in the year ahead improved in June to the brightest since February, with the optimism seen among both manufacturers and service providers. The respondents attributed the improved outlook partly to hopes of an easing of war-related disruptions and price pressures.
Sentiment among manufacturers and service providers, however, remained well below long-run averages to point to historically subdued business confidence overall. The predicament was blamed on the uncertainty over the economic outlook amid concerns relating to the ongoing impact of the war in the Middle East and government policies such as tariffs.
For Federal Reserve officials, the report presents a familiar dilemma: economic activity remains resilient enough to argue against aggressive policy easing, yet business confidence remains subdued enough to caution against further tightening.
What it means for markets
The PMI report reduced the likelihood of a near-term growth scare but did little to settle the inflation debate. As a result, Thursday's PCE inflation report remains the more consequential catalyst. A benign inflation reading would reinforce the soft-landing narrative implied by the PMI data, while a hotter-than-expected print could shift attention back to the risk of higher-for-longer interest rates.
Economist Mohamed El-Erian pointed to the brighter side of things. The data “confirm the strength of the US economy at a time when the household sector is also experiencing a reversal of the significant energy price hit,” he said.