Business owners see inflation in July, with consumers not spending much. This won't end well

Near the end of this week S&P released its Purchasing Managers' Index report for July. And while this report showed weakness in manufacturing, it also said the services economy was the strongest its been for all of 2025.

The headline S&P Global US PMI Composite Output Index rose sharply from 52.9 in June to 54.6 in July, according to the 'flash' reading (based on about 85% of usual survey responses). The latest reading signalled the fastest rate of growth recorded so far this year, with output having now increased continually for 30 months.

July’s expansion was powered by the services economy, where business activity rose at a rate not seen since last December. Although manufacturing output also rose, up for a second successive month, the rate of production growth moderated to signal only a modest expansion

But a big red flag in this report was that purchasing managers were telling S&P that prices are definitely on the rise, with tariffs a main reason why.

Price pressures intensified across both manufacturing and service sectors during July, widely blamed on higher goods prices due to tariffs but also in some cases due to rising labor costs. Average prices charged for goods and services rose at a rate just shy of May’s recent high to register the second-strongest monthly increase since September 2022….

Input cost inflation also picked up again, having eased slightly in June, registering the second-steepest rise since January 2023. The rate of input cost inflation remained especially sharp in manufacturing, despite cooling compared to June’s post-pandemic peak, and accelerated in services.

Close to two-thirds of all manufacturers reporting higher input costs attributed these to tariffs, whilst just under half of respondents explicitly linked their increased selling prices to tariffs. However, the tariff impact was by no means limited to factories, as around 40% of service providers reporting higher selling prices explicitly mentioned tariffs.

How is that not going to be passed onto consumers for the rest of the Summer and likely for the rest of 2025 (if they can get away with it)? In a logical economic world, the 0.3% increase in the CPI for June should continue at a similar rate for the coming months, shouldn't it?

And it's not like other parts of the underlying economy were doing well before July. UW-Madison Professor Menzie Chinn has a post at Econbrowser that shows a stagnation and/or slow declines in a number of key statistics in the US economy since Spring.

Sure, we may see a decent GDP number for Q2 when that gets released in the later part of next week. But don't forget, that will be entirely due to the "recovery" that reflects the unwinding of the pre-tariff import surge that reduced GDP in Q1. Almost all of the GDP increase for Q2 will not be because of an actual increase in economic activity.

And yet the stock market keeps rising to new records, with no real reason given, and unemployment claims are staying near historically low levels. With the combination of higher prices for businesses and eroding consumer demand, I just don't see how this ends well, and that it seems likely to end sooner than later.