In an unexpected turn, the growth of the private sector in the United States experienced a significant slowdown at the start of the second quarter, reaching its lowest expansion rate since December 2023. This development raises concerns about the future pace of economic recovery, as suggested by S&P Global Market Intelligence's chief business economist.

The flash Purchasing Managers Index (PMI) surveys released by S&P Global on Tuesday revealed key takeaways regarding the state of the private sector in April 2024. The U.S. Composite PMI dropped from 52.1 to 50.9, marking a four-month low. However, it is worth mentioning that April still marked the 15th consecutive month of output growth. On the other hand, the U.S. Services PMI decreased from 51.7 to 50.9, falling below expectations, while the U.S. Manufacturing PMI fell from 51.9 to 49.9, missing the forecasted value of 52.

The decline in output growth correlated with weakened demand, as new orders decreased for the first time in six months. Additionally, companies reduced employment for the first time in nearly four years, and business confidence hit its lowest level since November of the previous year. Despite these setbacks, the inflation rates exhibited a modest ease at the beginning of the second quarter, as both input costs and output prices rose at a slower pace overall. It is worth noting that manufacturing input cost inflation reached a one-year high.

Chris Williamson, the chief business economist at S&P Global Market Intelligence, expressed concerns about the economic upturn losing momentum at the start of the second quarter. He highlighted that inflows of new business fell for the first time in six months, while firms' future output expectations slipped to a five-month low. The tougher business conditions also led companies to reduce their workforce at a rate not seen since the global financial crisis, excluding the initial pandemic lockdown months.

The latest data also revealed a notable shift in the drivers of inflation. Williamson noted that manufacturing has experienced steeper rate increases in three of the past four months, with factory cost pressures intensifying in April due to higher raw material and fuel prices. This contrasts with the wage-related, services-led price pressures observed throughout much of 2023.

Financial markets reacted to the news, with the U.S. dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF UUP, falling by 0.4% due to the decline in Treasury yields. The two-year Treasury note, sensitive to policy changes, softened by 5 basis points to 4.94%. Meanwhile, stocks experienced a positive response, with the SPDR S&P 500 ETF Trust SPY rising by 0.8% in early trading on Tuesday. Tech stocks, as tracked by the Invesco QQQ Trust QQQ, outperformed, gaining 1%. Additionally, gold rebounded by 0.4% after facing its worst-performing day in years on Monday.

As uncertainties persist surrounding the pace of economic recovery, economists and market analysts will closely monitor future data releases to gauge the path of the private sector and its impact on the overall economy.