What happened
The S and P Global Flash US Composite PMI Output Index rose to 56.0 in August from 54.5 in July, the highest reading since April 2022. A PMI is a purchasing managers index, a monthly survey of the executives who actually place company orders, and any reading above 50 means activity is expanding rather than contracting.
Services did the heavy lifting. The services business activity index jumped to 56.8 from 54.6, a twenty month high. Manufacturing went the other way, slipping to 53.2 from 53.9, its weakest reading in five months, so the American economy is being carried by restaurants, software, healthcare and finance rather than by factories.
The detail underneath the headline was strong across the board. New business rose robustly, outstanding orders built up at the fastest rate since May 2022, and companies added workers at the strongest pace since the start of last year. Inflation pressures reported by firms eased at the same time, which is the rare combination policymakers hope for and seldom get.
Markets responded immediately. The S and P 500 closed 0.4 percent higher on Friday, the Nasdaq 100 added 0.3 percent and the Dow Jones Industrial Average gained 518 points. Even so, the major averages finished the week lower, having spent most of it digesting a sharp rise in bond yields driven by inflation and government borrowing concerns.
Why it matters
The survey now points to third quarter US growth approaching 3 percent on an annualised basis, up from the 1.5 percent pace recorded in the second quarter. That is a doubling of the growth rate in a single quarter, and it substantially weakens the argument that the American economy is heading for a downturn.
The combination matters more than the level. Growth accelerating while hiring rebounds and cost pressures ease is the profile of an economy expanding without generating inflation. If it holds, it removes the hardest tradeoff facing the Federal Reserve, which has been weighing inflation at 3.4 percent against signs of a softening economy.
It also raises the stakes for Jackson Hole. Fed chair Kevin Warsh speaks on Friday 28 August with futures markets pricing roughly a one in three chance of a rate rise in September. Data this strong makes it harder to argue for cuts and easier to argue that the economy can tolerate higher rates for longer.
For anyone outside the United States, the significance is simple arithmetic. The US accounts for roughly a quarter of global output and a much larger share of global stock market value. When the American private sector accelerates, it pulls demand for exports, commodities and services from everywhere else, including the UK.
Explained simply
A PMI is the economic equivalent of asking every chef in the country whether they are ordering more ingredients this month than last. You learn what the kitchens are doing weeks before anyone counts the meals served.
Official economic data is slow. Gross domestic product for a quarter is published weeks after the quarter has ended, and then revised twice. Purchasing managers indices are published within days of the month they cover, because they simply ask companies a set of yes or no questions about whether output, orders and hiring are up, down or unchanged.
The scoring is deliberately blunt. Fifty means no change. Above 50 means more firms reported an increase than a decrease. The distance from 50 indicates how widespread the change is, not how large it is, so 56.0 means expansion is broad rather than that output grew 6 percent.
The split between services and manufacturing is worth understanding because the two behave differently. Manufacturing is sensitive to interest rates, global trade and inventory cycles, so it turns first and turns sharply. Services track domestic consumer demand and employment, move more slowly and make up the large majority of a modern economy. Services strengthening while manufacturing softens usually means domestic demand is healthy but trade conditions are not.
The backlog figure is the underappreciated signal here. Outstanding orders accumulating at the fastest rate since May 2022 means firms are winning more work than they can complete, which is what typically forces them to hire. That is why the employment reading rebounded in the same survey.
What it means for you
Most UK savers own more American shares than they realise. A standard global equity tracker, the default fund in a large number of workplace pensions, holds roughly 60 to 70 percent of its value in US listed companies. Strong American economic data therefore flows into a UK pension valuation directly, without any conscious decision to invest in the US.
The right response to a good data print is almost always nothing. Attempting to trade around monthly economic releases is a reliable way to buy high and sell low, and the evidence that private investors can time these moves is thin. The value in reading data like this is understanding what you already own, not changing it.
Bond holders should note the tension. Yields rose sharply this month on inflation and fiscal concerns, and bond prices fall when yields rise. Anyone in a bond heavy fund, including pension savers close to retirement whose scheme automatically shifts them toward bonds, may see valuations under pressure even while equities rise.
If you hold dollars or plan a US trip, strong American data tends to support the dollar and weaken the pound against it. Sterling weakness makes American holidays more expensive but flatters the sterling value of any US shares you hold, which is one reason global funds have performed well for UK investors.
The bigger picture
April 2022 is a telling benchmark. That was the last month before the Federal Reserve began raising rates aggressively, and the economy has not run this warm since. Getting back to that level of activity while inflation is falling rather than accelerating would be a considerably better outcome than most forecasters expected a year ago.
The caution is that flash PMIs are estimates based on around 85 percent of survey responses and are revised when the full set arrives. One strong month is a signal, not a trend, and manufacturing weakening in the same survey is a reminder that the expansion is narrower than the headline implies.
Two events will test the reading quickly. Warsh speaks at Jackson Hole on Friday, and Nvidia reports results on Wednesday, which will show whether the artificial intelligence spending underpinning much of the recent market rise is still accelerating. Between them they will decide the tone of markets into September.
