U.S. economy improves in May after slump last month, S&P PMI surveys show

U.S. business activity rebounded in May, with the manufacturing PMI reaching 52.3 and the services PMI also hitting 52.3, exceeding economists' expectations. This acceleration from April's 19-month low was accompanied by the largest increase in prices for goods and services since August 2022, potentially signaling future consumer price hikes, while manufacturing input inventory holdings saw a record jump. Despite the positive sentiment about future output, stocks were lower and the 10-year Treasury yield declined in early trading.

Analysis

U.S. business activity demonstrated a notable improvement in May, with the S&P Flash U.S. Manufacturing PMI reaching a three-month high of 52.3 and the Services PMI rising to a two-month high, also at 52.3, both significantly exceeding economists' expectations and signaling expansion. This rebound from April's 19-month low in activity was, however, accompanied by the largest increase in prices for goods and services since August 2022, indicating escalating inflationary pressures that may translate into higher consumer prices. Concurrently, manufacturing input inventories saw their largest jump in the 18-year history of the survey, largely attributed by S&P Global to tariff-related supply shortage concerns and anticipated price hikes. While sentiment regarding future output improved to its highest level since January, partly reflecting relief from a temporary U.S.-China trade truce suspending tariffs, employment experienced a slight decline. The market reacted with caution, as evidenced by lower S&P 500 (SPX) levels and a drop in the 10-year Treasury yield to 4.592%, despite the otherwise expansionary economic indicators and rising price pressures.

Key Decisions for Investors

• Investors should closely monitor upcoming inflation data and central bank commentary, as the reported price increases could signal persistent inflationary pressures potentially influencing monetary policy.
• Consider the implications of the record manufacturing inventory build-up; while it may buffer against supply disruptions linked to trade policy, it also poses a risk of future destocking or margin pressure if demand weakens or trade tensions resolve more permanently.
• Evaluate the divergence between improving PMI data signaling economic expansion and the market's cautious reaction (lower stocks, falling yields), which suggests heightened sensitivity to inflation risks and potential headwinds.