US Flash PMIs Climb to 52.3 as Tariffs Drive Prices to Highest Since August 2022

US Flash PMIs for May exceeded expectations at 52.3 for both manufacturing and services, signaling increased business activity; however, rising price pressures, attributed to tariffs, fueled inflation concerns. Manufacturing saw the sharpest rise in output prices since September 2022, while services posted the highest increase since April 2023, potentially prompting a more hawkish stance from the Federal Reserve despite weak external demand and declining employment figures.

Analysis

US business activity, as measured by S&P Global's flash PMI data for May, showed an unexpected acceleration, with both manufacturing and services PMIs registering 52.3. The manufacturing PMI reached a three-month high, its strongest reading since June 2022, primarily driven by a record increase in input inventories as firms stockpiled in anticipation of tariff-related disruptions, rather than a robust surge in new orders. This inventory build-up, coupled with supplier delivery times lengthening to their worst since October 2022, signals significant supply chain pressures. Concurrently, inflationary pressures intensified markedly; manufacturing output prices saw their sharpest monthly rise since September 2022, and services charges increased at the fastest rate since April 2023, pushing overall selling prices to levels not seen since August 2022. These price hikes are explicitly attributed to tariff effects. Despite the headline PMI strength, external demand remains weak, with exports declining for a second consecutive month and services exports falling at the fastest pace since early 2020 (excluding pandemic periods). Employment also contracted, with manufacturing posting consecutive declines and services cutting payrolls for the second time in four months, indicating businesses are bracing for weaker forward demand and margin compression. While the US Services PMI Business Activity Index also rose to 52.3, up from 50.8 in April, driven by stronger domestic orders, overall business sentiment remains below the 2024 average due to policy and price uncertainties. The data presents a mixed picture: improved domestic output potentially fueled by preemptive inventory accumulation, but overshadowed by accelerating inflation linked to tariffs and weakening employment and export figures, thereby increasing the risk of a more hawkish Federal Reserve stance.

Key Decisions for Investors

• Investors should closely monitor the Federal Reserve's communications and potential policy responses to the accelerating inflation, as the PMI data increases the likelihood of tighter monetary conditions.
• Consider re-evaluating exposure to companies heavily reliant on international trade and exports, given the reported weakness in external demand and the negative impact of tariffs on input costs and potentially on profit margins.
• Exercise caution due to the conflicting signals of rising output from inventory building against a backdrop of declining employment and escalating price pressures, suggesting potential vulnerability in the sustainability of the current activity levels.
• Anticipate increased market volatility around the release of final PMI data in early June, which will provide further insight into the durability of these trends and the extent of inflationary pressures.