U.S. economy slows again, S&P finds, due to high inflation and rising interest rates

The numbers: U.S. businesses grew more slowly in August as high inflation and rising interest rates spurred customers to curb spending, a pair of surveys showed on Tuesday.

The S&P Global U.S. services sector index dropped to 44.1 from 47.3, based on “flash” survey. It was the fifth decline in a row and weakest reading since May 2020, shortly after the U.S. outbreak of the coronavirus pandemic.

The U.S. manufacturing sector index, meanwhile, slipped to 51.3 from 52.2 and registered the lowest reading in just over two years.

Readings above 50 signifies expansion; below that, contraction.

A pair of similar surveys by the Institute for Supply Management, however, show the economy is somewhat stronger than the S&P indexes indicate. The ISM surveys have been around a lot longer and arguably have a better track record.

Big picture: There’s no doubt about it though: The U.S. economy has slowed due to rising interest rates as the Federal Reserve tries to stamp out high inflation, but the economy is still growing.

The big question is, how much will the economy slow and will it slip into recession? Many economists think a recession is likely by year end or in 2023 if the Fed keeps raising interest rates.

Higher rates slow the economy by raising the cost of borrowing for consumers and businesses, making it harder to buy a house or car or take out a loan.

Key details: Both manufacturers and service-oriented companies such as retailers reported waning sales in August and the lowest demand in more than two years. They’ve scaled back hiring efforts in response.

In a bit of good news, the cost of supplies eased for the third month in a row. That’s a sign inflation pressures are relaxing after a big runup earlier in the year.

Rising wages, on the other hand, have partly offset the decelerating rise in the cost of supplies.

In any event, with their own costs leveling off, businesses raised the prices they charge customers at the slowest pace in 18 months. They also holding the line on prices to entice customers to spend more.

If inflation continues to ease, the Fed might not have to raise interest rates so high that the economy tips into recession.

Looking ahead: “Gathering clouds spread across the private sector as services new orders returned to contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts,” said Sian Jones, senior
economist at S&P Global Market Intelligence.

“The historical data for the services index only go back to late 2009, so we would be wary of attaching too much importance to this reading, particularly at a time when the ISM services index, which started in 1997, was at a relatively strong 56.7 in July,” said U.S. economist Paul Ashworth of capital Economics.

Market reaction: The Dow Jones Industrial Average
and S&P 500
rose slightly in Tuesday trades.