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Expect a Second-Quarter Peak in the Pace of the Economic Rebound

The economic rebound continues but the pace of manufacturing diverges from services.
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IHS Markit Composite PMI Flash 2021-06

Markit US Flash Composite PMI

IHS Markit notes a quicker pace of expansion for manufacturing but a slower pace for the service sector. 

Key Findings

  • Flash U.S. Composite Output Index at 59.7 (63.7 in June). 4-month low.|
  • Flash U.S. Services Business Activity Index at59.8 (64.6 in June). 5-month low.
  • Flash U.S. Manufacturing PMI at 63.1 (62.1 in June). Series record high.
  • Flash U.S. Manufacturing Output Index at 59.5 (58.9 in June). 2-month high.

U.S. private sector companies reported a further substantial expansion in business activity during July. That said, the rate of growth eased for the second month running to the softest since March, as firms continued to report widespread capacity constraints.

The rate of output growth was the slowest for four months, but robust nonetheless and among the fastest recorded over the survey’s 14-year history.

Cost burdens rose robustly once again in July. With the exception of record rates of input price inflation seen in May and June, the pace of increase was the sharpest since comparable data for goods and services were available in October 2009. Alongside reports of higher raw material and transportation prices, firms also noted greater wage bills as staff were enticed with higher pay in an effort to reduce backlogs of work.

 As a result, the rate of selling price inflation for goods and services remained historically steep in July, as firms sought to pass on higher costs to clients. The pace of increase was the third-sharpest on record.  

Comments from Chris Williamson, Markit Chief Economist

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  1.  “The provisional PMI data for July point to the pace of economic growth slowing for a second successive month, though importantly this cooling has followed an unprecedented growth spurt in May. Some moderation of service sector growth in particular was always on the cards after the initial reopening of the economy, and importantly we’re now seeing nicely-balanced strong growth across both manufacturing and services. 
  2. While the second quarter may therefore represent a peaking in the pace of economic growth according to the PMI, the third quarter is still looking encouragingly strong
  3. Short-term capacity issues remain a concern, constraining output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply. However, we’re already seeing signs of inflationary pressures peaking, with both input cost and selling price gauges falling for a second month in July, albeit remaining elevated
  4. Inflationary pressures and supply constraints – both in terms of labour and materials shortages - nevertheless remain major sources of uncertainty among businesses, as does the delta variant, all of which has pushed business optimism about the year ahead to the lowest seen so far this year. The concern is this drop in confidence could feed through to reduced spending, investment and hiring, adding to the possibility that growth could slow further in coming months.”  

Transitory or Not?

Williamson provides an interesting take given the huge debate over whether inflation is transitory.  

However, inflation peaking is not the same as inflation stalling, and a peak in the rate of growth is not a peak in growth. 

Stagflation Fears

It's also interesting to see business optimism dropping. Reading between the lines, it smacks of a fear of stagflation.