Economic activity was very weak this month. The headline composite output index dropped from July's final 48.5 to just 44.7, well short of the market consensus and a 39-month low. Recessionary conditions would appear to be deepening.

The headline decline was largely due to services where the flash sector PMI slumped from July's final 52.3 to 47.3, back in negative growth territory and a 9-month trough. Its manufacturing counterpart fared better inasmuch as it rose from 38.8 to 39.1 but the latest reading still points to another hefty contraction. Indeed, manufacturing output (39.7) saw its worst level in more than three years.

Ominously, total new orders fell again, led by a particularly weak manufacturing sector but also reflecting a steeper decline in services. Output would have been softer but for backlogs which were similarly pared again and by the most in more than three years. Employment was broadly stable despite a modest decline in manufacturing as firms remained reluctant to shed staff but, while ticking marginally higher, confidence about the year ahead was again pessimistic.

Not helping matters, inflation pressures increased with the overall input cost rate (first rise in 11-months) and output price rate (first rise in 7 months) both climbing to 3-month highs.

In sum, the August update warns of potentially another contraction in third quarter GDP. However, with pipeline inflation apparently on the rise again, the ECB will not see the data as providing any reason for taking its foot off the monetary brake. The German ECDI now stands at minus 16 and the ECDI-P at minus 13, both measures signalling a modest degree of overall economic underperformance.

Manufacturing has contracted for 13 months in a row and at the deepest rate of all in July at 38.8. Further weakness is expected for August where the consensus is 38.6. Services, which have been over 50 for the past seven months and at 52.3 in July, is seen slowing by nearly a point to 51.5.

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.