US Business Activity Slows in February as Composite PMI Declines
The latest flash estimate from S&P Global shows that the US S&P Global Composite PMI dropped to 50.4 in February, down from 52.7 in January. This suggests that while the private sector is still growing, the pace of expansion has slowed significantly.
Meanwhile, the S&P Global Manufacturing PMI—a key measure of industrial activity—edged up from 51.2 to 51.6, indicating continued expansion in the manufacturing sector. However, the Services PMI, which tracks business activity in the service industry, fell from 52.9 to 49.7, signaling a contraction. This marks a loss of momentum in the sector that contributes the most to US economic growth.
Source: create.vista.com
What is PMI, and Why Does It Matter?
PMI, or the Purchasing Managers’ Index, is an economic indicator derived from surveys of private-sector executives. It provides an early snapshot of business conditions before official GDP reports and is closely watched by investors, policymakers, and economists.
A PMI above 50 suggests economic expansion, while a PMI below 50 signals contraction. Because PMI reports are published monthly, they offer a real-time glimpse into economic health, covering factors such as output, new orders, employment trends, supplier deliveries, and price pressures.
The Composite PMI is a weighted average of both the Manufacturing PMI and the Services PMI, giving a broader picture of overall business activity.
Market Reaction and Economic Implications
Following the report, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that optimism about the economic outlook has fallen sharply, citing concerns over federal policies, tariffs, and geopolitical uncertainties. He added, “Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic.”
The mixed PMI data led to a reaction in the financial markets. The US Dollar Index (DXY), which measures the dollar against a basket of currencies, trimmed earlier gains and slipped to the 106.40 zone, still up modestly for the day. The uncertainty surrounding the Services PMI decline appears to have weighed on market sentiment.
What This Means for Interest Rates and Inflation
The Federal Reserve closely monitors PMI trends to assess inflation and employment dynamics. Fed Chair Jerome Powell recently emphasized that the central bank is in no rush to cut interest rates, citing a steady economy, strong job market, and inflation that remains above the 2% target.
If future PMI reports show rising input costs in the service sector alongside strong labor market data, the Fed may be inclined to maintain its higher interest rate stance for longer. Conversely, signs of weaker job growth and reduced price pressures could increase the likelihood of rate cuts, which could weigh on the US dollar.
Looking Ahead: What to Watch for in PMI Reports
Investors will be watching closely for inflationary signals and employment trends in upcoming PMI reports. A Manufacturing PMI holding above 50 would indicate resilience in the industrial sector, while a rebound in the Services PMI above 50 would suggest renewed economic strength. However, if the Services PMI remains below 50, concerns over slowing growth may intensify.
For now, February’s mixed PMI data presents a divided picture of the US economy, with manufacturing showing resilience but services struggling to maintain momentum. Market participants will be keeping a close eye on upcoming data releases to gauge the direction of economic activity in the coming months.
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