August services growth beats expectations as manufacturing slumps: Inflation gradually falls to “normal levels” – Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), SPDR S&P 500 (ARCA:SPY)

US private sector activity is expected to have increased more than expected this month, with growth in the services sector offsetting a worsening contraction in manufacturing, according to preliminary purchasing managers' indices (PMI) released by S&P Global on Thursday.

The preliminary Composite PMI index fell slightly to 54.1 in August from 54.3 in July, but beat expectations for a decline to 53.5. This is the 19th consecutive month that the private sector in the United States as a whole expanded.

Services Outshine Manufacturing

However, differences between sectors are widening. The services sector showed a strong performance, while manufacturing output recorded its sharpest decline in 14 months.

The preliminary PMI index for the services sector rose to 55.2 from 55 in July, beating the forecast of 54. The preliminary PMI index for manufacturing, however, fell to 48, below both the previous reading and the expected 49.6.

Manufacturing saw a sharp decline in new orders and inventories, and industrial production also fell for the first time in seven months.

“Better news on inflation: Prices of goods and services recorded the smallest increase since June 2020,” the report said.

According to S&P Global, price pressures have eased significantly and are now only slightly above the average of the decade before the pandemic.

Slowdown in the labour market is cause for concern

There were signs of a labor market slowdown in August, when employment fell for the first time in three months. The private sector reported net job losses in three of the last five months, marking the weakest period of wage growth since the first half of 2020.

“While the decline in employment in the services sector was largely due to difficulties in hiring staff and replacing those who leave, the slowdown in the manufacturing labor market was due to growing concerns about the business outlook,” S&P Global said.

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Data eases recession fears, inflation outlook improves

“The solid growth picture in August points to robust GDP growth of over 2% on an annual basis in the third quarter, which should help to allay recession fears in the near term,” said Chris WilliamsonChief Economist at S&P Global Market Intelligence.

Williamson added that the price dynamics observed in the August surveys “make a case for lower interest rates.” But he warned that economic growth was increasingly dependent on the services sector as manufacturing – which normally leads the business cycle – had fallen into recession.

“Overall, the key findings of the survey are that inflation continues to slowly return to normal levels and that the economy is at risk of slowing given the imbalances,” Williamson concluded.

Market reactions: Dollar up, yields rising, stock prices falling

The US dollar index (DXY), represented by the Invesco DB USD Index Bullish Fund ETF UUPrecovered after the release of the PMI report for August.

The greenback rose 0.4 percent against a basket of currencies and was on track to end a four-day losing streak.

The dollar rose 0.9 percent against the Japanese yen on Thursday as positive economic data slightly dampened market beliefs about excessive Fed rate cuts.

US Treasury yields rose across the board, boosting the iShares 20+ Year Treasury Bond ETF TLT a decrease of 0.8%.

The major US indices reacted negatively to the publication. The technology-heavy Nasdaq 100 index, which is Invesco QQQ Trust QQQ at 10:10 a.m. ET into negative territory. The S&P 500, as indicated by the SPDR S&P 500 ETF Trust SPYwas flat.

Gold was the hardest hit, with the yellow metal losing 1.3 percent and on track for its worst trading session in more than two weeks.

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