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U.S. private-sector business activity contracted for a second straight month in August to its weakest in 27 months with particular softness registered in the services sector as demand weakened in the face of inflation and tighter financial conditions.

The S&P Global flash composite purchasing managers index (PMI) for August dropped to 45 — the lowest since May 2020 — from a final reading of 47.7 in July. A reading below 50 indicates a contraction in activity.

The falloff was more notable in services — where that sector’s PMI dropped to 44.1 from 47.3 last month — than in factory activity. The survey’s manufacturing gauge still showed modest expansion at 51.3, versus July’s 52.2.

Both were the lowest since mid-2020 and were also below the median estimate in a poll of Reuters economists, with the services reading coming in well below the consensus forecast of 49.2. The factory activity estimate was 52.

“Material shortages, delivery delays, hikes in interest rates, and strong inflationary pressures all served to dampen customer demand, according to panelists,” the report said.

The composite survey’s new orders index contracted to a reading of 48.8 — the lowest since May 2020 — from 50.8 in July. Aside from the dive in new orders during three months in the spring of 2020 around the first wave of COVID-19 lockdowns, the August reading was the lowest since the series launched in October 2009.

The survey’s indexes of input and output prices both fell again, to the lowest since February of 2021, the latest signal that inflationary pressures may be easing.

The drop in demand reflected in the PMI surveys is exactly what the Federal Reserve is trying to engineer with the stiffest run of interest rate increases since the 1980s. With inflation also running near a 40-year high, it has risen rates from near zero in March to their current range of 2.25% to 2.50%, and officials project more to come in the months ahead.

Copyright 2022 Thomson/Reuters