Note: I am travelling for another 2 weeks. Postings may be fewer and shorter.
PMI SERVICES
S&P Global: Business optimism strengthens to eight-monthhigh as activity and sales rise solidly
The headline S&P Global US Services PMI® Business Activity Index registered 54.6 in July, up from 51.2 in June and above the earlier ‘flash’ estimate of 53.6. The final reading was the highest for nine months and signaled a solid expansion in activity.
Panelists commonly linked the improvement in output to stronger new order inflows. Latest survey data showed the most marked rise in new work since November 2025. Some firms noted a temporary boost from major events, including the FIFA World Cup and expanded US Independence Day events.
The expansion in sales was primarily domestically driven, as export trade deteriorated more sharply than in June. The reduction was amongst the steepest since late 2022 and was often attributed to higher tariffs and the war in the Middle East.
Confidence in the outlook, as measured by the Future Activity Index, strengthened from June. Business expansion plans and new product launches were cited as key supports to the outlook, while firms also hoped for improved domestic and geopolitical conditions. Optimism reached its highest level since November 2025.
Higher orders and a more positive outlook encouraged firms to raise staffing numbers at the start of the third quarter. Although only marginal, the rate of job creation was the strongest for eight months. Firms also reported rising capacity pressures, as backlogs of work increased at the sharpest rate since February.
Latest prices data signaled a continuation of above-trend input cost inflation, with overall costs rising at the fastest pace since May 2025. Tariffs, together with higher raw material and fuel costs, were widely cited as key drivers of increased operating expenses.
Where possible, firms sought to pass higher costs on to clients through increased selling prices. Charge inflation remained above its long-run trend and accelerated to a 14-month high in July.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
“The final July PMI has come in stronger than the earlier flash estimate, signaling an encouraging acceleration in economic growth at the start of the third quarter. The PMI points to GDP rising at an annualized rate of 2.3%, following a 1.5% increase indicated for the second quarter. Business optimism has meanwhile climbed to its highest since last November.
“Some caution is needed in interpreting these improvements, as the stronger performance partly reflected temporary factors. We note that the biggest improvement in demand in July was reported among consumer-facing service providers, spending on which surged at a rate not seen for over four years linked to the FIFA World Cup and US Independence Day events.
“More importantly, businesses benefited in early July from a tailwind of reduced geopolitical uncertainty and lower oil prices. With hostilities in the Gulf escalating as the month progressed, the geopolitical environment is now likely once again acting more as a headwind to growth while exacerbating already-elevated price pressures.”
- ISM Services Slightly Below Expectations (Goldman Sachs)
The ISM services index edged up by 0.1pt to 54.1 in July, slightly below expectations for a larger increase. The composition of the report was mixed, with increases in the business activity (+3.7pt to 59.1) and new orders (+2.1pt to 57.2) components but a decline in the employment component (-3.8pt to 47.4) that reversed its large increase in June.
The new export orders index (+1.6pt to 52.0) and the imports index (+2.4pt to 51.8) both increased.
The prices paid measure increased by 2.6pt to 70.3, likely reflecting the increase in energy prices following the re-escalation of the Iran conflict and roughly returning to the levels reached between March and May.
The press release characterized overall services activity as “resilient,” and noted that the World Cup continued to contribute to increased business activity and new orders as in June. It also highlighted that “tariff impacts and the Middle East conflict continued to be mentioned by respondents, but much less frequently than in prior reports,” but noted that concerns still remain around the impact of the recent run-up in oil prices on input costs.
Canada: Service sector continues to falter
Latest PMI data point to another month of underwhelming service sector performance during July. This was in line with a challenging business climate as tariffs and geopolitics continue to dominate both near-term activity and the outlook for the coming year.
Both output and new orders fell again, albeit to lesser degrees, whilst confidence regarding the future sank to the lowest of 2026 so far.
Adding to the challenging environment was the continuation of steeply rising input costs, again linked to tariffs and the crisis in the Middle East pushing up energy and fuel expenses. Allied with increased staffing
expenses, overall input price inflation was amongst the steepest recorded since the fall of 2022. Selling prices were raised as a result, despite the subdued demand environment, which adds to some risks to the broader growth and inflation outlook.
Productivity Growth Above Expectations; Unit Labor Costs Below Expectations (GS)
Nonfarm productivity increased above expectations in Q2 (+1.4%, quarter-over-quarter annualized), and the year-over-year rate declined by 0.7pp to +2.2%.
Since 2019Q4, labor productivity has grown at an annualized rate of 2.1%, well above the 1.3% annualized rate of the proceeding decade.
We expect labor productivity growth to average around 2.3% over 2026-2030.
Unit labor costs—compensation divided by output—increased by less than expected in Q2 (+1.3%, quarter-over-quarter annualized), and the year-on-year rate increased by 1.0pp to +1.4%. Compensation per hour accelerated to an annualized pace of 2.7% in Q2 (vs. 2.1% in Q1), and the year-on-year rate increased by 0.4pp to 3.7%.
Our wage tracker stands at 2.9% annualized in Q2 (vs. 2.9% in Q1) and 3.6% year-over-year (vs. 3.5% in Q1), below the pace we estimate is consistent with 2% inflation.
CONSUMER WATCH
These Middle America brands are struggling in the street fight over consumers
Several major brands that target working-class and middle-income Americans are struggling to attract customers.
While much of the market’s attention is focused on the booming AI economy, there’s a street fight going on among some of the biggest brands for the wallets of value-conscious consumers.
Signs of trouble are emerging for multiple major players:
- Papa John’s shares plummeted Thursday after the chain reported an 8.3% decline in sales at its North American restaurants open at least a year, telling analysts the company must meet the customer “where they are in this challenged environment.”
- Popeyes Louisiana Kitchen recorded a 5.2% drop in comparable sales at its U.S. locations, and vowed going forward to focus on offering “consistent, easy-to-understand value.”
- Budget gym chain Planet Fitness posted a 1.7% slump in the same metric at its clubs, and talked about “reinforcing affordability” to reignite member growth.
- Six Flags Entertainment reported a 4% drop in same-park attendance at its amusement parks, though it argued it sees opportunities to expand with consumers “whatever side of the K they might be coming from.”
While consumer spending has been strong overall in recent months, Mastercard chief business officer Sachin Mehra noted on an earnings call last week that a portion of it “has come on account of higher fuel prices” and the one-time effect of the World Cup.
Some companies that target low- and middle-income consumers are doing just fine.
- Burger King — which, like Popeyes, is owned by Restaurant Brands International — enjoyed a buoyant quarter with an 8.5% increase in U.S. comparable sales.
- The chain’s marketing and product investments are paying off, helping it gain momentum against arch-rival McDonald’s, which posted a disappointing 0.8% increase in U.S. comparable sales as it failed to execute on its value strategy.
- Keurig Dr. Pepper CEO Timothy Cofer said Thursday on an earnings call that consumers are “responding” to the company’s “compelling value proposition.”
Consumers haven’t stopped spending. They’re just becoming much more selective about where they do it.
Host cities got an economic assist from the World Cup
To get a real sense of the incremental boost to spending that local host cities enjoyed over the tournament it’s important to compare them to cities that did not host games. Exhibit 4 looks specifically at brick and mortar (B&M) restaurant and bar spending over the tournament compared to the period before. It confirms that host cities saw spending growth in this area strengthen relative to the period before the tournament, while this trend was not generally seen elsewhere.
Notice the slowdown in “all else” cities since mid-June, from 4.5% YoY to 3.1%, before inflation.
Thank you AI!
- 92% of the economy is growing 1% 8% of the economy is growing 14%.
@EPBResearch
THE BOILING CAULDRON
Houthi strikes kill dozens in Yemen, officials say, as Saudi Arabia warns of further attacks Latest attacks by Iran-aligned Houthis spark concerns that Middle East crisis is intensifying
Attacks by the Iran-aligned Houthis on a military camp in Yemen and in Saudi Arabia have sparked concerns that the Middle East crisis will continue to spiral.
Yemen is being increasingly drawn into the US-Israeli war with Iran, with the Houthi rebels stepping up attacks against both government forces inside the country and neighbouring Saudi Arabia, a key US ally and supporter of the internationally recognised Yemeni government.
On Thursday, at least 30 Yemeni government troops were killed in Houthi attacks on military camps in Yemen, government sources said, warning the death toll could rise. Some reports have put the death toll as high as 58. (…)
Yemen’s defence ministry said in a statement only that its armed forces would respond to the attacks “at the appropriate place and time”, while the health minister ordered medical facilities to increase readiness to treat wounded soldiers.
Yemeni sources said recently they believe Saudi Arabia is preparing for a major military offensive against the Houthis by sea and possibly by land in central Yemen, in a move to break their chokehold on Saudi oil exports through the southern Red Sea.
In a separate attack early on Friday, a Saudi official accused the Houthis of indiscriminately shelling civilian areas in Saudi Arabia, injuring 11 civilians, including a four-year-old child. (…)
Saudi Arabia and the Houthis have been vying for control of Yemen for more than a decade but over the past month an uneasy status quo has unravelled, with the Houthis mounting attacks against Saudi Aramco oil facilities.
The Houthi movement, which controls Yemen’s capital Sana’a and much of its Red Sea coastline, declared a naval blockade of Saudi Arabia in the Red Sea last month.
A senior Saudi official on Thursday said the kingdom was expecting imminent coordinated attacks from the north and south by Iraqi militias and the Houthis in Yemen under the supervision of Iran’s Islamic Revolutionary Guard Corps. (…)
Recall that at the outset of the conflict in Yemen in 2015, Saudi Arabia and the United Arab Emirates promised the Obama administration that it would be over in six weeks.
In this week’s Foreign Affairs, Kori Schake, who served on the National Security Council and in the U.S. State Department under President George W. Bush, first details how this war was so badly managed before offering a very unlikely way out: Congress.
(…) It seems extremely unlikely that the Trump administration will be chastened by its failure in Iran. Shamelessness has been central to Trump’s business and political success, and his reaction to setbacks is to deny objective facts and construct fantasies of achievement. The rigors of war do not seem to have persuaded him of the need for a more coherent process of policy formulation and assessment; he continues to blurt out his every whim, and a cabinet of sycophants and amplifiers is unlikely to impose discipline on an undisciplined principal.
Nor can the two parts of the government that have apparently provided solid strategic judgments—the CIA and the military—salvage the process. They are advisory bodies, not policy actors, and Trump repudiates or ignores their counsel whenever it conflicts with his claims or preferences.
At the time of this writing, Iran’s government remains unyielding in its demands, the Islamic Revolutionary Guard Corps is still in firm control of the country, and Trump appears unwilling to escalate U.S. military action in a way that would fundamentally alter the dynamic.
For the foreseeable future, the administration will likely continue to carry on sporadic standoff strikes of tactical brilliance and strategic irrelevance and pursue negotiations aimed at restoring a cease-fire—all while hoping, almost surely in vain, that the Iranian regime will collapse or be overthrown. The precise outcome is impossible to predict, but it will almost certainly leave the United States politically and militarily weaker and less trusted as a security partner.
Adherence to the Powell Doctrine could have prevented those losses. It could also help Trump chart a way out of the extended purgatory his conduct of the war has produced. At one extreme, he could use it to justify accepting a loss. Acknowledging the lack of public or international support for and the mounting costs of the war, Trump could camouflage defeat by making the case that he achieved his most important objectives: the practical destruction of Iran’s nuclear program and the significant degradation of its conventional military.
Alternatively, the president could start over and build a plan consistent with the doctrine’s outlines. He could start by recognizing the national security imperative of maintaining freedom of navigation and obtain congressional authorization to use force to restore it in the Strait of Hormuz.
The administration would have to reliably convey to the Iranians that its primary objective is opening the strait and that to achieve that goal, the United States would lift sanctions on Iran and refrain from using force against the country for anything other than its nuclear program. (…)
Left to its own devices, the Trump administration is highly unlikely to put forward such a plan. The only thing that might force it to do so is pressure from Congress.
Wistful appeals to congressional action should be accompanied by the desolate strains of Tchaikovsky’s Pathétique: in Trump’s second term, instead of fulfilling its constitutional obligations, the Republican-controlled Congress has been negligent. It has confirmed dangerously unqualified appointees, passed budget legislation using so-called reconciliation (which requires only a simple majority instead of 60 votes) rather than through regular order, assented to war in the absence of any request for congressional authorization, and allowed the executive branch to divert some appropriated funds while failing to spend others.
There are reasons, however, that Congress may yet assert its authority. The GOP would like to retain control of both houses, and Trump’s foundering policies and staggering corruption are so deeply unpopular that barring a change of course, Republicans are likely to surrender their slim majority in the House of Representatives and could even lose their more comfortable Senate majority.
Some evidence that the party is aware of this reality is apparent in recent votes in which Congress proposed an end to the war in Iran, enacted restrictions on the Defense Department’s ability to withdraw troops from overseas deployments, and forced the White House to withdraw a record number of nominees from consideration for confirmation.
Going forward, Congress could pass resolutions outlining alternative strategies and regularly drag cabinet officials up to Capitol Hill to testify on the conduct of the war. More consequentially, Congress could legislate the redeployment of forces currently assigned to the conflict and reject the removal of forces from Asia or Europe for use in the Iran operation. Such a move would likely be found unconstitutional. But taken together, such actions would increase the political price the president would pay for continuing to wage war in a reckless manner.
Congress’s strongest form of leverage over the executive branch is the power of the purse. On July 21, Hegseth claimed the war had so far cost $37.5 billion—although the defense budgeting expert Elaine McCusker believes the true figure is probably over $50 billion—and the administration has submitted a poorly justified supplemental spending request for an additional $88 billion. Congress should stipulate that it will not authorize any further funding until the administration presents a plan that would pass the Powell Doctrine’s tests.
In his 1995 memoir, My American Journey, Powell wrote: “Many of my generation, the career captains, majors, and lieutenant colonels seasoned in [the Vietnam War], vowed that when our turn came to call the shots, we would not quietly acquiesce in halfhearted warfare for half-baked reasons that the American people could not understand.” That is precisely the kind of warfare that Trump has undertaken. And so far, Congress has quietly acquiesced. It can, however, still change course. A true victory in Iran is unlikely. But a cataclysmic defeat is not yet inevitable.
Congress? That Congress? It’s why the US should not fight, rather.
