U.S. Business Gauge Surged in June, Still Signals Contraction

(Bloomberg) -- U.S. business activity shrank in June at the slowest pace in four months, indicating further improvement for the economy as it attempts to break out of a steep recession.

The IHS Markit preliminary composite index of purchasing managers at manufacturers and service providers rose 9.8 points to a pre-pandemic high of 46.8 after a 10-point upturn in May, the company reported Tuesday. The data for the world’s largest economy mirror progress in Germany, France, the U.K. and Australia.

IHS Markit composite measures of U.S. orders, employment and exports continued to rise in June, each approaching a reading of 50 that is the dividing line between expansion and contraction. Further, June was marked by a notable increase in confidence as firms grew optimistic about year-ahead demand for the first time in four months.

Nonetheless, while many manufacturers and service providers acknowledged a rebound in demand, purchasing managers also noted that it remains subdued amid concerns about a pickup in Covid-19 infection rates and social distancing.

“The improvement will fuel hopes that the economy can return to growth in the third quarter,’’ Chris Williamson, chief business economist at IHS Markit, said in a statement. “However, although brief, the downturn has been fiercer than anything seen previously, leaving a deep scar which will take a long time to heal.’’

While materials costs increased, firms indicated that they had more ability to pass on higher input costs associated with pandemic-related disruptions to the supply chain. Some said less discounting was needed.

The IHS Markit gauge of services climbed to 46.7 this month from 37.5 in May, trailing the median forecast of 48. The index of manufacturing rose to 49.6, compared with a Bloomberg survey median of 50, from 39.8.

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