Detailed PMI Sector Data Highlight Growing Rift Between Manufacturing and Services Economies in August
The August global manufacturing PMI has signaled a renewed decline in manufacturing output, sparking concern about potential spillover effects into the services sector, which is currently the principal engine driving global economic growth. Despite the manufacturing sector’s disproportionate influence on the economy—accounting for only about one-tenth of GDP in most developed countries—its health is deemed critically important due to its predictive capabilities. Historical PMI data suggest that a downturn in manufacturing typically precedes a notable softening in the service sector within six months.
However, it is not guaranteed that a broader economic slowdown is imminent. The downturn in manufacturing could be a temporary setback, with potential interest rate cuts on the horizon expected to rejuvenate demand, investment, and business activity. The decreasing dependency on manufacturing in economies raises questions about whether this cycle might differ. Additionally, business trends during the summer months tend to exhibit volatility, making the forthcoming September PMI data pivotal in ascertaining the short-term direction of global growth, particularly concerning the interaction between goods and services sectors.
The headline global PMI, encompassing monthly output changes across all significant developed and emerging markets, remained in the expansion zone in August. This marked the tenth consecutive month of growth, with a slight acceleration in expansion pace representing one of the strongest increases over the past year.
Yet, concerns have surfaced due to the dependence of recent upturns on heightened service sector activity, while manufacturing output experienced a decline in August. In fact, among the 25 sub-sectors tracked by the PMI, 11 reported reduced output in August, the largest fraction of declining sectors since the previous November.
Financial services emerged as the fastest expanding broad industry in August for the second consecutive month, driven by eased financial conditions and increased demand for banking services. However, the highest growth rates were observed in sub-sectors offering business services, including commercial, professional, and software services.
Contrasting with robust growth in business-to-business services, consumer services saw only a modest increase in activity in August, partly due to stagnant tourism and recreation activities. On the other end, the basic materials sector saw the most significant decline, attributed to a drop in demand for raw materials amid inventory and economic outlook concerns. Notably, the August PMI surveys indicated the sharpest decrease in input purchasing by factories so far this year.
The auto and parts sub-sector was particularly hard hit, experiencing the most substantial contraction rate in 20 months — a correction following a brief surge in growth during the second quarter. Additionally, sectors oriented towards capital expenditure, such as machinery & equipment and construction materials, witnessed notable declines, suggesting a dip in global investment spending, albeit with a rebound in tech equipment output.
A critical question for the future is whether lower interest rates can galvanize the manufacturing sector through increased consumer spending and capital expenditure (capex). Historically, downturns in manufacturing have typically led to a deterioration in the broader services economy’s performance. However, a revival in the banking sector often precedes the manufacturing sector’s recovery, offering a glimmer of hope for future economic stabilization and growth.
The Purchasing Managers’ Index™ (PMI) data, compiled by S&P Global for more than 40 economies globally, play a vital role in providing insights into the economic health of the private sector. With a comprehensive coverage that includes a headline number reflecting overall economic health and sub-indices shedding light on key economic drivers like GDP, inflation, exports, and employment, the PMI data serve as an essential tool for financial and corporate professionals aiming to navigate economic trends and identify opportunities.
