Business Leaders Report First Output Contraction Since 2020 As Consumers Get Pinched By Inflation
People walk through a shuttered business district in Brooklyn on May 12, 2020 in New York City.
Spencer Platt/Getty Images

Executives are reporting the sharpest decline in business activity since the spring of 2020, according to a Friday release from S&P Global.

S&P Global’s most recent Purchasing Managers’ Index (PMI), which tracks business leaders’ reported changes in their companies’ output, fell from 52.3 in June to 47.5 in July, with readings below 50 marking contraction territory. The downturn is occurring to a “degree not seen outside of COVID-19 lockdowns since 2009.”

“The downturn was led by a steep drop in service sector activity, though production at manufacturers also fell marginally, down for the first time in over two years,” S&P Global said. “Companies noted that weak demand conditions stemmed from severe inflationary pressures and hikes in interest rates, which have exerted further strain on domestic client spending. Foreign client demand also weakened, causing new export orders to fall for a second successive month.”

The Consumer Price Index (CPI) rose 9.1% between June 2021 and June 2022, while the Producer Price Index (PPI) rose 11.3% over the same period, according to data from the U.S. Bureau of Labor Statistics. A recent poll from the National Federation of Independent Businesses shows that 34% of small business owners are calling inflationary pressures their “single most important problem” — the highest level since 1980.

S&P Global likewise said that businesses are facing “upticks in input costs at suppliers, as fuel, transportation, raw material and wage expenses rose further,” causing many businesses to raise the prices they charge consumers. Indeed, energy prices have surged since the beginning of the year, while worker shortages driven by a decline in the labor force participation rate — the percentage of people who either have a job or are actively looking for one — have worsened inflation as businesses struggle to find employees.

“Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook,” S&P Global Market Intelligence Chief Business Economist Chris Williamson said. He added that a moderation in demand “has helped to alleviate inflationary pressures,” although supply issues are persisting.

Biden administration officials are seeking to expand semiconductor supplies — a move that could reduce the cost of automobiles and manufacturing equipment. The United States represents 12% of global semiconductor manufacturing and 25% of global semiconductor demand, according to Radford University management professor Zachary Collier.

Earlier this week, Treasury Secretary Janet Yellen traveled to South Korea and other Asian allies to discuss strengthening trade in the semiconductor sector. “Resilient supply chains mean a diversity of sources of supply and eliminating to the extent we can the possibility that geopolitical rivals will be able to manipulate us and threaten our security,” Yellen explained in reference to “real concerns” about China’s willingness to sever trade ties with rival nations.

Lawmakers have proposed the $52 billion CHIPS for America Act — yet because the funding has not yet reached chipmakers, companies such as Intel, TSMC, and GlobalFoundries recently issued “public warnings” that they might “scale back their plans to make semiconductors” in the United States, according to the U.S. Department of Commerce.

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