US Business Activity Surges in May, Driven by Service Providers but Faces Inflation Challenges

In May, US business activity experienced a significant increase, reaching its fastest pace in two years. The growth was driven by stronger performance from service providers and accompanied by a rise in inflation. The S&P Global flash May composite purchasing managers index rose by more than 3 points to 54.4, the highest level since April 2022, indicating expansion.

The advance suggests that there was a notable acceleration in overall activity during the second quarter. Despite subdued April retail sales and declining factory output, service providers experienced the quickest growth this month. Manufacturing output also expanded at a faster pace, contributing to resilient demand that is challenging efforts to cool inflation.

However, the S&P Global composite measure of input prices increased to the second-highest level since September, along with a rise in the group’s gauge of prices charged. This inflationary pressure is primarily coming from manufacturing rather than services, indicating that rates of inflation for costs and selling prices are higher than pre-pandemic standards. This challenges the Federal Reserve’s goal of reaching a 2% inflation target.

According to Chris Williamson, chief business economist at S&P Global Market Intelligence, achieving the Fed’s inflation target remains elusive due to elevated inflation levels in both the manufacturing and service sectors. Factory input prices saw the fastest increase since November 2022 while prices paid and received by service providers also rose. The data suggests that inflation remains a significant concern despite efforts to keep interest rates higher for longer.

Overall, this report highlights how US business activity has been on an upward trajectory in early May with strong performance from service providers driving it forward. However, this growth has come with rising inflation levels which pose a challenge for policymakers trying to control it within acceptable limits.