Economic activity continued to undershoot market expectations in July. The headline composite output index dropped to 48.3, more than a full point below the consensus and some 2.3 points short of June's final print. The latest reading thus moved back below the 50-expansion threshold and was the weakest in eight months.

Activity in services expanded again but, at 52.0, the flash sector PMI was 2.1 points below its final June outturn and at its lowest level in five months. By contrast, manufacturing fell further into recession with a flash PMI of 38.8, down from June's final 40.6, and a 38-month trough. Within this, manufacturing output (41.0) declined for a third successive month and by the most since May 2020.

Ominously, total new orders saw their steepest drop in three years, reflecting sizeable losses in both sectors. In addition, both the domestic and overseas markets contracted. Weak demand prompted the sharpest fall in backlogs in more than three years as producers tried to shore up output. Employment growth at least remained positive, but job creation still matched the weakest in nearly two-and-a-half years as a reduced pace of hiring in services was compounded by another drop in manufacturing payrolls. Against this backdrop, business sentiment about the coming year turned negative for the first time since last December as increased pessimism in manufacturing outweighed cautious optimism in services.

Overall inflation pressures eased further this month but another fall in the cost rate was wholly attributable to manufacturing which posted one of the steepest outright declines on record. Significantly, service sector cost inflation remained strong and even accelerated slightly. A similar pattern was also true of the aggregate output price rate, where a 29-month low masked significantly diverging trends.

The July update is disappointingly weak and would be even worse but for what remains a reasonably resilient service sector. The recession in manufacturing continues to deepen at an alarming rate. Inflation news is improving but today's update will ensure that the ECB will pay close attention to developments in services. The German ECDI now stands at minus 12 and the ECDI-P at minus 21, both measures signalling a modest degree of overall economic underperformance.

Manufacturing has contracted for 12 months in a row and, at 40.6, very deeply so in June with no improvement at all expected for July where the consensus is 40.4. Services in contrast, which have been over 50 for the past six months, are seen slowing a bit to 53.0 versus June's 54.1. The composite is expected to fall below 50 to 49.7 versus June's 50.6.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. The flash data are released around ten days ahead of the final report and are typically based upon around 85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The data are produced by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.