The U.S. economy has surged back into full throttle after two months of slower growth, with flash PMI data for May indicating the fastest expansion in over two years. However, this growth is accompanied by a rebound in input costs, raising concerns about the feasibility of returning to the Fed's 2% inflation target.
The U.S. Composite PMI, a key indicator of private sector economic health, jumped to 54.4 in May, up from April's 51.3. This marks the highest level since April 2022 and exceeds market expectations of 51.1, according to preliminary data released by S&P Global.
Both the services and manufacturing sectors showed expansions. The S&P Global US Services PMI rose to 54.8 in May 2024 from 51.3 the previous month, significantly surpassing market expectations of 51.3. Similarly, the S&P Global US Manufacturing PMI increased to 50.9 in May 2024, rebounding from April's 50 and exceeding forecasts of 50.
"The data put the US economy back on course for another solid GDP gain in the second quarter," Chris Williamson, chief business economist at S&P Global Market Intelligence, commented.
The Atlanta Fed's GDPNow model projects that the U.S. economy is on track to achieve a 3.6% real growth rate in the current quarter, indicating a robust expansion and an acceleration compared to the 1.6% growth achieved in the first quarter.
May PMI Surveys: Key Highlights
- May's improved performance was driven by the service sector, with business activity achieving its fastest growth in a year.
- Manufacturing output also expanded at an increased pace in May, marking the fourth consecutive month of rising factory production.
- Optimism about future output increased in both manufacturing and services, driven by brighter business prospects often linked to expansion plans, new products, and increased marketing.
- Both input costs and output prices rose at faster rates, with manufacturers experiencing the steepest cost increase in a year and a half due to higher supplier prices for various inputs, including metals, chemicals, plastics, timber-based products, energy, and labor.
- Companies attempted to pass higher costs onto customers, leading to a slight acceleration in the rate of increase in selling prices compared to April.
- Businesses continued to express uncertainty about the economic outlook due to the potential for prolonged high interest rates, upcoming elections, and broader geopolitical uncertainties.
"Not only has output risen in response to renewed order book growth, but business confidence has lifted higher to signal brighter prospects for the year ahead," Williamson stated.
The economist observed that selling prices have increased and continue to indicate modestly above-target inflation.
He highlighted that the primary inflationary pressure is now originating from the manufacturing sector rather than services.
Consequently, the rates of inflation for both costs and selling prices are elevated by pre-pandemic standards in both sectors, suggesting that "the final mile down to the Fed's 2% target still seems elusive."
Market Reactions
S&P Global's PMI data for May led to declines in stocks and gold while pushing Treasury yields higher, as traders reduced expectations for interest rate cuts.
The rate-sensitive 2-year Treasury yield rose by 8 basis points to 4.96%, approaching its highest level since May 1.
Long-dated 30-year Treasury yields increased by 5 basis points to 4.59%, causing the iShares 20+ Year Treasury ETF
The S&P 500 erased its session gains, with the SPDR S&P 500 ETF Trust
Both the Dow Jones and the Russell 2000 fell by 0.7%.
Gold, as tracked by the SPDR Gold Trust
