WASHINGTON (Reuters) – U.S. business activity accelerated in May to the highest level in just over two years, but manufacturers reported a rise in prices for a range of commodities, suggesting goods inflation could pick up in coming months.
S&P Global said Thursday that the flash US Composite PMI Output Index, which tracks manufacturing and services sectors, rose to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.
A reading above 50 indicates expansion in the private sector. Economists polled by Reuters had predicted the index would change little at 51.1. The increase was driven by the services sector, with the preliminary PMI rising to 54.8 from 51.3 in April. The manufacturing PMI rose from 50.0 to 50.9.
At first glance, the jump in activity indicated that economic growth was picking up in the middle of the second quarter.
Gross domestic product rose 1.6% year-on-year in the January-March quarter, largely held back by a rise in imports to meet strong domestic demand.
So-called hard data for April, including retail sales, construction starts and permits, as well as industrial production, have indicated that the economy lost further momentum early in the second quarter. The labor market is also slowing down.
“Business confidence is up, pointing to a brighter outlook for the year ahead,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “However, companies remain cautious about the economic outlook, amid uncertainty about the future path of inflation and interest rates, and continue to express concerns about geopolitical instability and the presidential election.”
The S&P Global survey’s measure of new orders received by private companies rose to 51.7 this month from 49.1 in April. The employment measure shrank for the second month in a row, although the pace of decline slowed.
Companies faced higher prices for inputs. The manufacturing input price index rose to its highest level in a year and a half, amid reports of higher supplier prices for a wide range of inputs, including metals, chemicals, plastics and wood-based products, as well as energy and labor costs. This could indicate that the disinflation of the goods sector is nearing an end.
Higher personnel costs also drove up costs for service companies. Companies tried to pass higher costs on to customers by raising sales prices.
“What’s interesting is that the main inflation push is now coming from the manufacturing sector rather than the services sector, meaning that cost and retail price inflation rates in both sectors are now slightly elevated to pre-pandemic standards, which suggests indicates that the last mile to the bottom of the Federal Reserve has been reached. The 2% target still seems elusive,” said Williamson.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
