U.S. Private Sector Growth Reaches Two-Year High While Policies May Weigh on Sovereign Rating

The fastest growth in overall business activity since May 2015 was signaled in August, according to the IHS Markit Flash U.S. Composite Purchasing Managers’ Index. Though manufacturing production growth slowed, a sharp increase in service sector activity drove the index higher.

“The U.S. economic growth story remained a tale of two sectors in August,” said Rob Dobson, director at IHS Markit. “The overall rate of expansion accelerated to a 27-month record, driven higher by strong and improved growth of business activity in the vast services economy. In contrast, the performance of manufacturing remained sluggish in comparison, with production volumes rising to the weakest extent in over a year.”

New business volumes grew at the quickest pace in a little more than two years while total new orders increased at a quicker pace in August. Input costs rose, with the rate of inflation reaching a four-month high.

In the service sector, strong economic conditions and improvement in demand drove the upturn, with a significant rise in new business received. In the manufacturing sector, weaker increases in output and new orders weighed on the modest rate of improvement. New business growth weakened in manufacturing and production volumes grew at the slowest rate for 14 months.

The main downside risk to growth remains exports, IHS Markit said. “Foreign goods orders fell—albeit only marginally—for the second month in a row, often blamed on the strength of the dollar. The domestic demand picture should hopefully remain relatively bright to offset such risks, however.”

Meanwhile, as deadlines approach for the U.S. Congress to reach agreement concerning government funding and the federal debt limit, Fitch Ratings warns that it may need to review the United States’ sovereign rating, with potentially negative implications, if the debt limit is not raised in a timely manner. “Prioritizing debt service payment over other obligations if the limit is not raised—if legally and technically feasible—may not be compatible with ‘AAA’ status,” analysts said. “In Fitch’s view, the economic impact of stopping other spending to prioritize debt repayment, and potential damage to investor confidence in the full faith and credit of the U.S., which enables its ‘AAA’ rating to tolerate such high public debt, would be negative for U.S. sovereign creditworthiness.”

Latest budget resolutions assume a 2.6% growth rate, Fitch said, which the ratings agency views as optimistic over the medium term. Fitch forecasts 2.6% growth for 2018, with a slowdown to 2.2% in 2019.

– Adam Fusco, associate editor

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