US Economy Expands at Fastest Pace This Year, but Factories Slide Into Contraction

The economy entered the third quarter with solid momentum, although a pullback in factory activity signals fresh challenges ahead.

Workers fix a road in Los Angeles on July 22, 2025. John Fredricks/The Epoch Times

The U.S. economy accelerated in July at its fastest pace so far in 2025, according to a closely watched purchasing managers’ survey released on July 24, which showed surging demand for services—even as factory activity slipped back into contraction.

S&P Global’s flash U.S. Composite PMI Output Index climbed to 54.6 this month from 52.9 in June, signaling the strongest overall growth in seven months and extending a 30‑month run of expansion.

The services sector led the gains, with its business activity index jumping to 55.2, hitting a seven-month high.

Factory activity faltered, however, with the manufacturing PMI dropping to 49.5 in July. This was the first reading below 50 this year, indicating a renewed downturn for the manufacturing sector, which President Donald Trump has been trying to revitalize with tariffs and other policies meant to rebuild the nation’s eroded industrial base.

The split points to an uneven recovery, with households and businesses continuing to spend on services in July, while factories reported new orders falling for the first time this year, along with leaner inventories after manufacturers rushed to build up stockpiles in May and June ahead of the Trump administration’s anticipated tariffs.

“Growth was worryingly uneven and overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year, the latter linked to a fading boost from tariff front-running,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.

Overall, the PMI data suggest that the U.S. economy grew at a sharply faster rate at the start of the third quarter—consistent with a 2.3 percent annualized pace of growth—compared with the 1.3 percent that earlier S&P Global PMI surveys signaled for the second quarter, Williamson said.

Official government data for the second-quarter gross domestic product (GDP) are not set to be released until July 30. The most recent Federal Reserve Bank of Philadelphia survey of professional forecasters estimated a 1.4 percent pace of growth in the April-to-June quarter. The economy shrank by 0.5 percent in the first quarter, driven by sluggish spending and a tariff-driven spike in imports, which subtracted from GDP calculations.

The PMI report comes as other forecasts also point to firmer growth. The New York Fed’s GDP Nowcast pegs third-quarter growth at roughly 2.4 percent, which would mark a sharp rebound from the first quarter’s contraction and ease recession fears that roiled markets earlier this year following the Trump administration’s unveiling of reciprocal tariff plans.

Meanwhile, inflationary pressures jumped in July, with the PMI survey flagging the second-sharpest increases in prices for goods and services in the past three years. Nearly two-thirds of manufacturers who reported higher input costs linked them to tariffs, while just under half of all respondents attributed increased selling prices to the administration’s trade policies.

“The rise in selling prices for goods and services in July, which was one of the largest seen over the past three years, suggests that consumer price inflation will rise further above the Federal Reserve’s 2 percent target in the coming months as these price hikes feed through to households,” Williamson predicted.

The Fed, which raised rates aggressively in 2022 and 2023 to tame inflation, cut them three times in late 2024 and has since paused to assess the impact of the Trump administration’s trade and fiscal policies. Federal Reserve Chair Jerome Powell told lawmakers in June that the full effects of the latest tariffs might not become clear until mid‑summer.

Business sentiment grew more cautious despite stronger headline growth. The PMI survey found confidence about the year ahead slipping to one of its lowest levels in more than two years, reflecting uncertainty over federal spending cuts and the durability of the services boom.

“Even in manufacturing, any protectionist benefits of import tariffs were often outweighed by concerns over higher prices and rising costs,” the PMI survey stated.

Still, other recent data show that recession fears have subsided and that the inflation outlook has stabilized at pre-tariff levels, while June saw a marked improvement in consumer spending.