In February, the US PMI composite output index came in at 50.4, down from 52.7 in January, the lowest level in 17 months. The index of business activity in the services sector fell to 49.7, indicating the sector’s first contraction in 25 months. In contrast, industrial output rose to 53.8, an 11-month high, while the manufacturing PMI came in at 51.6, reflecting an improvement compared to the previous month..
The data suggests that U.S. business activity is nearing a recession, as a decline in services output offset growth in manufacturing. New orders also fell sharply, adding to uncertainty about government policies. The rise in industrial output is partly attributable to tariffs, suggesting that this increase may be temporary. At the same time, input cost pressures have raised, especially in the manufacturing sector, where firms have passed on price increases resulting from tariffs and higher wages. A high level of arrears may indicate capacity constraints or increased demand.
The S&P Global US Composite Output fell to 50.4, indicating a near-complete halt to business activity. Optimism about the future eased to its lowest level since December 2022, as concern about government policies and inflation increased. The services sector saw a marked deterioration in confidence, while sentiment in manufacturing remained relatively high.
After rising in January, selling price inflation slowed to a three-month low. However, there was a divergence in trends by sector, as intense competition in the services sector significantly reduced inflation. In contrast, the manufacturing sector saw the largest increase in costs, with raw material prices rising significantly due to tariffs.
Components of the US manufacturing PMI and their economic importance
The Services PMI report (Services PMI) usually consists of several key components that provide insights into the state of the services sector. These components include:
Business activity: This component measures the level of business activity in the services sector during the reporting period. It reflects whether companies are experiencing growth, contraction or stability in their operations.
New orders: New orders refer to the demand for services in the market. An increase in new orders indicates increased demand, while a decline may indicate weaker demand.
Employment: The Employment component of the Services PMI report shows changes in the level of employment within the services sector. It indicates whether companies are hiring, laying off, or maintaining their workforce.
Work arrears: Work arrears represent the amount of unfinished work accumulated by service providers. A high level of arrears may indicate capacity constraints or increased demand.
Business Outlook: This component measures providers’ sentiment regarding future business conditions. A positive outlook can indicate confidence in future growth, while a negative outlook may indicate concerns about economic conditions.
Supplier deliveries: Supplier deliveries measure the speed at which services are delivered by suppliers to businesses. Slower deliveries may indicate supply chain disruptions or increased demand.
Composite PMI: The composite PMI combines the Services PMI and the Manufacturing PMI to provide a comprehensive overview of economic activity in both the services and manufacturing sectors.
Together, these components provide a detailed picture of the health and performance of the service sector, providing valuable insights into economic trends, business conditions and potential future developments. Analyzing these components helps businesses, policymakers, and investors make informed decisions based on the current state of the service industry.
Difference between PMI for services and manufacturing
The services PMI (services PMI) and the manufacturing PMI (manufacturing PMI) are both important indicators of economic health, but they focus on different sectors of the economy. Here are some of the key differences between the two:
Sector Focus:
- The Services PMI measures business activity in the services sector, which includes industries such as healthcare, finance, retail, hospitality, and transportation.
- On the other hand, the manufacturing PMI focuses on the manufacturing sector, which involves the production of physical goods such as automobiles, machinery, and electronics.
Nature of output:
- The PMI in the services sector reflects the provision of intangible services, such as consulting, education, healthcare and tourism.
- The manufacturing PMI reflects the production of tangible goods in factories and facilities.
Differences in the supply chain:
- Manufacturing usually involves complex supply chains with raw materials, intermediate goods, and finished products. The manufacturing PMI often includes components such as supplier deliveries and inventories.
Factors affecting performance:
- The performance of the services sector is closely linked to consumer spending, business investment, and general economic sentiment.
- The performance of the manufacturing sector is influenced by factors such as global demand for goods, industrial production, and input costs.
Impact on the economy:
- The services sector tends to be more resilient during economic downturns, when demand for certain services such as healthcare and education remains relatively stable.
- Manufacturing is more cyclical and sensitive to changes in world trade, industrial production, and consumer demand for durable goods.
Employment Patterns:
- The services sector is often more labor-intensive than manufacturing, with a higher proportion of service jobs in many economies.
- Manufacturing tends to employ a smaller share of the workforce but can have significant multiplier effects on employment due to its impact on related industries and supply chains.
