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Economy slowing sharply due to high inflation and rising interest rates, S&P finds – News Opener

The numbers: U.S. businesses suffered a sharp slowdown in June, a pair of surveys showed, as high inflation forced customers to cut back on orders and rising interest rates induced growing worries about a recession.

The S&P U.S. services index fell to a five-month low of 51.6 in June from 53.4 in May, based on “flash” survey. Readings above 50 signifies expansion; below that, contraction.

The U.S. manufacturing index, meanwhile, slid to a nearly two-year low of 52.4 from 57. Similar surveys in Europe also pointed to a manufacturing slowdown.

The one upside of the report: Weaker demand triggered declines this month in the cost of business supplies and what companies charge.

Chris Williamson, chief business economist at S&P Global, said it could be a sign that inflation has peaked.

Big picture: Demand is slowing as customers balk at higher prices and talk of recession grows. While labor and supply shortages persist, high inflation and rising interest rates are overtaking them as the biggest worry of business.

The Federal Reserves hopes to quench inflation by sharply raising interest rates and tempering demand, but a central bank misstep could also drive the U.S. into recession, economists warn.

Key details: New orders declined for both manufacturers and service-oriented companies for the first time since early in the pandemic in the summer of 2020.

High prices tied to inflation caused some customers to put off purchases, but ongoing shortages of materials and delivery delays were also factors.

Softer demand spurred businesses to restock inventories at a slower pace and cut back on hiring, S&P said. Both of those trends, if they persist, would herald a weaker economy.

The one benefit of waning demand: The cost of business supplies fell and companies reduced the prices of their goods and services. That’s what the Fed wants to see.

The S&P report used to be known as IHS Markit.

Looking ahead: “The pace of U.S. economic growth has slowed sharply in
June,” Williamson said. “Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession.”

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.51%

and S&P 500
SPX,
+0.85%

rose in Thursday trades.

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