Business activity slowed much more rapidly than expected in August. The flash composite output index slumped from July's final 50.8 to 47.9, more than 2 points short of the market consensus and its worst reading since January 2021. This was the first sub-50 print in half a year.

Activity rates in both manufacturing and services decelerated sharply. In the former, at 42.5 after July's final 45.3, the flash sector PMI signalled the weakest performance in some 39 months with output (43.3) hitting a 12-month low. In services the flash sector PMI stood at 48.7, down from 51.5 and a 7-month trough.

Aggregate new orders declined for a second consecutive month and by the most since November 2022 on the back of losses in both sectors. Backlogs were down for a fourth straight month and at the fastest rate since June 2020 and weak demand contributed towards the smallest increase in overall headcount since March. However, shortages of skilled labour were again also an important factor limiting recruitment. Even so, business sentiment deteriorated only marginally and remained close to its long-run average.

Meantime, average costs continued to rise as higher wages, mainly in services, more than offset cheaper energy and raw materials. However, the inflation rate was still the lowest since February 2021. Output price inflation similarly moderated to its weakest mark in two-and-a-half years.

In sum, the August data point to a significant loss of economic momentum this month and suggest a 0.2 percent quarterly contraction in GDP. With pipeline inflation rates also falling the BoE MPC will face a tricky decision in September. Nonetheless, with underlying CPI inflation still so high and wages on the up, another hike in Bank Rate looks very probable. That said, today's disappointingly soft update trims the UK's ECDI to minus 16 and the ECDI-P to minus 32 so both measures now show overall economic activity falling somewhat short of market expectations.

Services, at 51.5 in July, have held above 50 the last six months with 50.6 the expectation for August. Manufacturing, which has been in sub-50 contraction for twelve months in a row, is seen at 45.1 versus 45.3. The composite is expected to fall to 50.2 from July's 50.8.

The flash Composite Purchasing Managers’ Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of the manufacturing and service sectors of the economy, around 650 companies in each case. The flash data are released around ten days ahead of the final report and are typically based upon around 75-85 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 survey is 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' surveys, investors will know what the economic backdrop is for the various markets. The flash PMIs are particularly closely watched as they provide a wide ranging look at economic developments and some of the most up to date information available. 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.