While service sector growth remains sluggish and consumer confidence is low, US manufacturing has surprisingly become a key pillar supporting economic expansion.

Data released by S&P Global on June 23 shows the preliminary US Composite Purchasing Managers' Index (PMI) for June rose to 52.2, exceeding the previous figure and reaching a five-month high, indicating continued expansion in US business activity. Manufacturing performance was particularly robust, with new orders growing at their fastest pace in over four years, significantly boosting factory production.

Simultaneously, expectations of easing cost pressures due to a de-escalation in Middle East tensions have also boosted business confidence. However, the survey also indicates that challenges such as supply chain delays, rising raw material costs, and slowing employment growth persist, suggesting the economic recovery is not yet on solid ground.

Manufacturing Expands Strongly, Services Recovery Lags

The preliminary US Manufacturing PMI for June climbed to 55.7, marking its highest level since May 2022, significantly surpassing the expected 54.6 and the previous 55.1. A substantial rebound in order demand was the primary driver of this expansion, with factory new orders recording their fastest growth rate in over four years. Companies accelerated production to meet this demand, leading to a notable increase in overall manufacturing activity.

However, Chris Williamson, Chief Business Economist at S&P Global, cautioned that the current strong momentum in manufacturing is partly supported by precautionary stockpiling by businesses and may not reflect a substantial improvement in end-user demand. He noted that while manufacturing is indeed showing more positive signs, part of the growth stems from companies building inventories in advance due to concerns about potential supply chain disruptions.

In contrast to the standout performance of manufacturing, the US services sector continues to expand at a moderate pace. The preliminary Services PMI for June came in at 51.3, slightly above the expected 51.1 and the previous 50.7, indicating a marginal month-on-month improvement in service sector activity, partly benefiting from consumption boosts from events like the World Cup.

Nevertheless, high prices and persistently weak consumer confidence continue to restrain demand growth. Williamson stated that the services sector "continues to grow at an unusually subdued pace," reflecting the ongoing significant divergence within the US economic structure.

Procurement Stockpiling Hits Second-Highest on Record, Employment Index Falls to Six-Year Low

The survey shows that despite a moderation in the rate of increase in input costs, supplier delivery times continued to lengthen, indicating a resurgence of supply chain pressures.

Facing potential supply disruption risks and the prospect of further future price hikes, US manufacturers significantly expanded their procurement of raw materials. Factory purchases of inputs surged in June, with the pace of raw material inventory accumulation reaching the second-highest level in the survey's history. This reflects companies actively securing supplies in advance to hedge against future cost and logistical uncertainties.

Against a backdrop of ongoing cost pressure transmission, businesses have begun to control operational costs by curbing labor expenses.

Survey data indicates that employment numbers declined in both the manufacturing and services sectors in June. The manufacturing employment index fell to its lowest level since May 2020, indicating that while companies are ramping up output, they remain cautious about new hiring. Meanwhile, service sector firms chose to pass on cost pressures by raising selling prices, with the rate of price increases accelerating.

Easing Middle East Tensions Boost Business Confidence

Despite ongoing cost and supply chain challenges, business optimism about the future outlook has improved noticeably.

S&P Global pointed out that future expectations among both manufacturers and service providers have rebounded, primarily due to market expectations that easing Middle East tensions will alleviate energy and transportation cost pressures.

The survey was conducted between June 11 and 22. During this period, the US and Iran signed a memorandum of understanding, paving the way for a potential long-term peace agreement. Businesses generally believe that if geopolitical risks continue to subside, the cost environment could improve further in the coming months, thereby providing support for economic activity.