Activity in the US services sector, the largest in the economy, accelerated in July, partially driven by increased spending linked to the FIFA World Cup and the Independence Day holiday, while manufacturing sector growth slowed to its weakest since March, as the pace of precautionary inventory buildup—sparked by the US and Israel's war against Iran—declined.

Purchasing Managers' Index surveys by S&P Global showed that the US economy started the third quarter with strong momentum, but this performance faces growing challenges due to the exceptional nature of the factors that supported July's growth, along with the recent escalation in the Iranian conflict, which pushed energy prices back up after declining over the past two months to near pre-war levels, according to Reuters.

The preliminary services PMI rose to 53.6 in July, its highest since November, from 51.2 in June, helping to lift the composite output index to 53.6 as well, the highest reading in eight months, versus 51.9 in the previous month.

In contrast, the manufacturing PMI edged down to 53.8 from 53.9 in June, limiting the overall gains in the composite index.

Readings above 50 indicate economic activity growth. Economists polled by Reuters had expected the services index to rise to 51.5 and the manufacturing index to increase to 54.3.

Chris Williamson, chief economist at S&P Global Market Intelligence, said US companies 'recorded a strong start to the third quarter,' adding that current data are consistent with GDP growing at an annualized rate of about 2 percent during the July-September period.

The US government is set to release its first estimate of second-quarter GDP next week, while preliminary estimates by economists polled by Reuters point to growth steady at around 2 percent, near the first-quarter rate of 2.1 percent.

The services sector recorded its largest increase in new orders since November, while new orders growth in the goods sector slowed to a four-month low. Employment saw modest growth in both services and manufacturing.

Williamson explained that part of the improvement in July may be temporary, noting that hospitality spending was boosted by World Cup events and celebrations of the 250th anniversary of the founding of the United States.

He added that the manufacturing slowdown is a concern, as inventories built up over the past months begin to decline, noting that companies faced worsening supply chain disruptions in July and a renewed increase in price pressures, which limited growth and affected demand.

The resumption of mutual airstrikes with Iran and the renewed closure of navigation in the vital Strait of Hormuz pushed global oil prices close to $100 per barrel, compared to around $70 at the start of July, and the average gasoline price in the US rose to over $4 per gallon.

Williamson warned that these developments could disrupt the recent improvement, saying that rising tensions in the Middle East may add pressure on supply chains and prices, and increase risks of a near-term economic outlook deterioration, suggesting that July's rebound 'may not represent the start of a sustained positive trend.'