U.S. business activity accelerated sharply in August, with the private sector expanding at its fastest pace in more than four years as a powerful rebound in services more than offset a slowdown in manufacturing.
The S&P Global flash U.S. Composite PMI Output Index rose to 56 in August from 54.5 in July, marking a 52-month high and the strongest rate of expansion since April 2022. Economists, on average, had positioned for a slight deceleration, with a reading of 54.
The data points to a significant acceleration in economic growth during the third quarter. S&P Global estimates that the survey is currently signaling annualized GDP growth approaching 3.0%, up from 1.5% in the second quarter.
The report presents an interesting combination for financial markets. Growth is accelerating, employment is strengthening and business confidence is improving, while price pressures are easing.
Services Take the Lead
The biggest driver of the August acceleration was the services sector.
The flash U.S. Services PMI Business Activity Index jumped to 56.8 from 54.6, reaching a 20-month high, exceeding the consensus estimate of 53.9. Service-sector demand also strengthened, with new orders improving from July.
The revival marks a shift in the composition of U.S. growth. Manufacturing had been a significant contributor during the second quarter, but its momentum has faded over the summer. Services are now taking over as the principal engine of expansion.
That could prove important for the broader economic outlook because the services sector is closely tied to consumer spending and financial activity.
S&P Global Chief Business Economist Chris Williamson said the data show that U.S. businesses are "booming," with third-quarter output growth currently pointing to an annualized pace approaching 3%.
Manufacturing Loses Momentum
The manufacturing sector moved in the opposite direction.
The flash U.S. Manufacturing PMI fell to 53.2 from 53.9, a five-month low, below the consensus of 54. The Manufacturing Output Index dropped to 51.9 from 53.9, reaching a 13-month low.
Factory production growth slowed for a third consecutive month. New-order growth also weakened, while manufacturers reduced input purchases for the first time since February.
Part of the slowdown appears to reflect a fading inventory-building impulse. Earlier in the year, manufacturers had been building safety stocks amid concerns about tariffs, supply shortages and the war in the Middle East. That precautionary stockpiling now appears to be losing momentum.
The manufacturing slowdown therefore does not necessarily point to a broad deterioration in demand. Instead, it appears to reflect a combination of reduced inventory accumulation and persistent supply constraints.
Supply Chains Remain a Risk
Supply-chain pressures remain an important wrinkle in an otherwise strong report.
Supplier delivery times lengthened sharply in August, reaching one of the most severe deteriorations seen over the past four years. Companies cited shipping delays, tariffs and reduced availability of supplies.
Those delays contributed to a further accumulation of backlogs across both manufacturing and services.
In manufacturing, outstanding orders continued to rise, while service-sector backlogs increased at their fastest pace since May 2022.
That suggests demand remains strong enough to overwhelm capacity in some parts of the economy, even as manufacturing output itself slows.
Jobs Growth Rebounds
The employment figures provide another encouraging signal for the U.S. economy.
After showing little net change over the previous eight months, private-sector employment increased sharply in August. The pace of job creation was the strongest since January 2025 and the second strongest recorded over the past four years.
Services accounted for much of the increase, with service-sector hiring reaching its strongest pace since the beginning of last year. Factory employment also increased at its fastest rate since May.
The improvement appears to reflect stronger confidence among businesses, fuller order books and expectations of sustained demand.
Business expectations for future output also improved for a third consecutive month, reaching a nine-month high.
The Good News for the Fed: Price Pressures Are Cooling
Perhaps the most market-friendly aspect of the report is what happened to prices.
Average input costs across goods and services increased at their slowest pace since February, while selling-price inflation also moderated.
Services cost inflation cooled notably from July's 14-month high, while manufacturing input-cost inflation eased for a third consecutive month.
Selling-price inflation fell to its lowest level since November, with services price growth reaching a 10-month low and manufacturing price growth a six-month low.
That is important because the combination of stronger growth and softer price pressures is close to an ideal outcome for policymakers.
There are still risks, however. Input costs remain elevated historically, with businesses continuing to cite energy prices, tariffs and supply-chain pressures. A renewed increase in energy prices could therefore quickly reverse some of the improvement.
What It Means for the Fed and Markets
The August PMI complicates neither the growth outlook nor the inflation picture as much as some economic reports tend to do. Instead, it delivers a relatively constructive message: the economy is gaining momentum while inflationary pressure is moving in the right direction.
For the Federal Reserve, that could be a favorable combination. Strong growth reduces recession concerns, while easing selling-price inflation provides some breathing room on the inflation side.
But the strength of the growth data could also keep Treasury yields elevated if investors interpret the report as evidence that the economy is running too strongly to warrant aggressive policy easing.
That makes the report particularly relevant ahead of Jackson Hole, where investors will be watching for signals about the Fed's policy outlook.
For equities, especially the Nasdaq 100, the distinction is important. Strong economic growth supports corporate earnings, but higher yields can put pressure on the valuations of long-duration technology stocks.
The report therefore reinforces the importance of next week's two major catalysts: Nvidia earnings and Jackson Hole. Nvidia will provide a crucial test of the technology sector's earnings and AI-growth story, while the Fed gathering could determine whether the bond market interprets this strength as a reason to expect rates to remain higher for longer.
For now, the PMI's message is clear. The U.S. economy is not losing momentum. Its growth engine is simply shifting from manufacturing toward services, while price pressures are cooling.
