Economic activity was disappointingly soft this month. At 47.0, the flash composite output index was 1.4 points short of the market consensus, 1.6 points below its final reading in July and indicative of the worst period for economic output in some 33 months. The headline decline reflected a much weaker performance by services, where the sector flash PMI fell from July's final 50.9 to a 30-month low of 48.3. By contrast, its manufacturing counterpart rose from 42.7 to (a still very weak) 43.7.

Manufacturing output (also 43.7) fell for a fifth straight month and both sectors saw a further decline in new business. Indeed, aggregate demand decreased at the steepest rate since November 2020 on the back of a particularly marked drop in services. Outside of the Covid period, backlogs posted their largest fall since November 2012. Labour hoarding continued to support employment but the overall rise here was the smallest since February 2021 and masked a third successive decrease in manufacturing. Against this backdrop, business sentiment deteriorated for a sixth straight month and to its lowest level since last December.

Meantime, input cost inflation edged higher for the first time in 11 months although it remained below its long-run average. Output price inflation similarly rose for the first time in seven months.

A combination of falling demand and output but increasing inflation will not go down well at the ECB. For policy, it will be stronger price pressures that dominate so today's update should be seen as increasing the likelihood of another hike in key interest rates next month. The region's ECDI and ECDI-P both now stand at minus 14, showing a limited degree of underperformance versus market expectations and warning of a possible contraction in real GDP this quarter.

After July's 42.7 for manufacturing and 50.9 for services, the consensus estimates for August's readings are 42.4 and 50.5, respectively. Manufacturing has been in contraction for the last 13 months straight with services in expansion for the last seven.

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. 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, produced by S&P Global uses a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

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.