US business activity picked up noticeably in August, with the composite PMI reaching its highest level in over four years. A robust expansion in the services sector has become the primary engine of economic growth, while the labor market is also showing signs of recovery. Meanwhile, price pressures at the corporate level have eased somewhat, suggesting that inflationary pressures have not yet intensified further despite the acceleration in growth.

Preliminary data released by S&P Global on August 21 showed the US Composite PMI Output Index rose to 56.0 in August, up notably from 54.5 in July and marking the highest reading since April 2022. The Services Business Activity Index climbed from 54.6 to 56.8, its strongest level since December 2024; meanwhile, the Manufacturing PMI slipped from 53.9 to 53.2, with the manufacturing output index falling further to 51.9, a 13-month low.

Chris Williamson, Chief Business Economist at S&P Global, noted that the latest survey suggests US GDP is on track to grow at an annualized rate of nearly 3.0% in the third quarter, significantly above the 1.5% recorded in the second quarter. This indicates that the momentum of US economic growth is shifting from manufacturing to services.

Notably, the labor market has also shown clear signs of improvement. The Composite Employment Index posted its largest single-month gain of the year, with new hiring reaching the strongest level since January 2025. At the same time, business expectations for output over the next 12 months rose to their highest point since November of last year.

Services Take the Baton as Growth Momentum Shifts

The services sector is the core driver behind the acceleration of US economic activity in August.

The Services Business Activity Index rose to 56.8, with new order growth also improving in tandem. Backlogs of work expanded at the fastest pace since May 2022, indicating that demand remains robust while capacity constraints persist at some firms.

By contrast, manufacturing sentiment has cooled somewhat. The Manufacturing PMI slipped to 53.2, its lowest level since March of this year; manufacturing output growth slowed for the third consecutive month to a 13-month low, and new order growth also fell to its weakest pace since March.

Williamson pointed out that the momentum of US economic growth has clearly rotated from manufacturing to services between the second and third quarters. The durability of the economic expansion will increasingly depend on areas such as consumer spending and financial services.

Supply Chain Disruptions Constrain Manufacturing Growth

Behind the manufacturing slowdown, supply chain pressures remain a significant constraint.

Supplier delivery delays in August were among the most severe seen in the past four years, with companies primarily affected by shipping delays, tariffs, and low supplier inventories. Disrupted supply chains have also led to a sustained increase in manufacturing backlogs, which have been growing at their fastest pace since 2022 following the outbreak of the Middle East conflict.

At the same time, the earlier wave of inventory building by firms to hedge against supply risks is beginning to cool. Manufacturers' purchasing activity declined for the first time this year in August, suggesting that companies are scaling back procurement after a period of concentrated stockpiling.

Williamson said supply chain delays have clearly constrained actual output for some businesses, and the situation in the Middle East remains a significant risk for companies, particularly through its potential impact on supply chains and energy prices.

Employment Recovers and Business Confidence Improves

The labor market is another highlight in the August data.

The Composite Employment Index posted its largest monthly gain of the year and the second-largest increase in the past four years. Employment growth in the services sector reached its fastest pace since early 2025, while manufacturing employment also rebounded.

Business confidence has likewise improved noticeably. Expectations for output over the next 12 months rose for the third consecutive month, reaching their highest level since last November. Rising backlogs, improved client inquiries, and firms' own expansion plans all contributed to a more optimistic outlook among businesses.

Williamson believes that the diminishing negative economic impact of tariffs and the easing of uncertainty stemming from the Middle East conflict are key reasons behind the improvement in employer sentiment.

Inflation Pressures Cool, But Energy Remains a Risk

Even as economic activity accelerates markedly, price pressures have shown signs of moderation.

In August, the rise in combined input costs across businesses slowed to its lowest level since February of this year, while the increase in combined selling prices fell to its weakest pace since last November. The pace of selling price increases in the services sector hit a ten-month low, and manufacturing selling price inflation also eased to a six-month low.

Manufacturing input cost inflation narrowed for the third consecutive month, and services input price inflation also retreated notably after hitting a 14-month high in July. Companies indicated that energy prices, supply chain disruptions, and tariffs remain the primary sources of current price pressures.

However, inflation has not entirely escaped risk. Williamson noted that average cost increases so far in the third quarter remain slightly above the overall level of the second quarter. If energy prices climb again, inflationary pressures could easily resurface.