S&P Global Aggregation
Service Sector 54.8, Manufacturing 50.9... Exceeding Expectations
Industrial activity encompassing both manufacturing and services in the United States expanded at the fastest pace in two years this month. This is an unwelcome signal for markets waiting for the Federal Reserve (Fed) to cut interest rates.
On the 23rd (local time), S&P Global announced that the composite Purchasing Managers' Index (PMI) covering U.S. manufacturing and services for May rose 3 points from 51.1 last month to 54.4. This is the highest level in 25 months since April 2022, significantly surpassing expert forecasts of 51.3.
A PMI above 50 indicates economic expansion, while below 50 signals contraction. The composite PMI reaching 54.4 means the U.S. economy's expansion phase has accelerated.
In particular, the strong performance of the services sector led the rise in the composite PMI. The services PMI this month was 54.8, exceeding both last month's 51.3 and market expectations of 51.2. The manufacturing PMI also came in at 50.9, surpassing both last month's 50 and expert forecasts of 50.
S&P Global diagnosed that rising raw material prices in manufacturing could sustain inflation.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, "The interesting point is that the main driver of inflation now comes from manufacturing rather than services," adding, "The rate of increase in costs and selling prices has risen somewhat compared to pre-COVID-19 pandemic levels, making the Fed's inflation target of 2% still seem difficult to achieve in the final stretch." He further noted, "This data has put the U.S. economy back on a trajectory to achieve solid GDP growth in the second quarter."
As the U.S. economy continues its expansion, analysts say this is not a positive signal for markets hoping for Fed rate cuts.
Bloomberg reported, "Such resilient demand makes it difficult for inflation to cool down," and "This helps explain why the Fed intends to keep interest rates higher for longer."
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