The US economy is defying expectations amid concerns of a slowdown, achieving robust growth.
S&P Global’s flash US composite PMI, which measures activity in both the services and manufacturing sectors, surged to 54.4 in May, up from 51.3 in April. Economists had anticipated the index to remain relatively unchanged in May, but it instead hit a 25-month high.
Both the services and manufacturing sectors were in expansion mode, with services driving most of the gains for the composite index. The services component of S&P’s report showed the index at 54.8 this month, up from 54.2 in April. Manufacturing activity reached a reading of 50.9, up from 50 in April.
Any reading above 50 for these indexes indicates expansion in the sector, while readings below 50 signal contraction.
Fastest Expansion in Over Two Years
“The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signaling the fastest expansion for just over two years in May,” Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote in the release. “The data put the US economy back on course for another solid GDP gain in the second quarter.”
Other recent data had suggested the economy was cooling. The April jobs report showed fewer job additions than expected and a rise in the unemployment rate, while the preliminary reading of first quarter GDP indicated the US economy grew at a slower pace than initially thought.
Market Reaction and Inflation Concerns
Largely, the market had interpreted that data as a positive sign for the Fed’s fight against inflation. However, Thursday’s hot PMI reading sent stocks to their session lows, while the 10-year Treasury yield (^TNX) quickly added 3 basis points to hit 4.46%. Notably, the interest rate-sensitive Russell 2000 (^RUT) turned negative after the print, falling more than 0.5%.
“[Services] is obviously a very interest rate-sensitive part of the economy, and that acceleration in growth is clearly one that is going to worry the central bank in particular that you’ve got some building demand pressures here in the economy again,” Williamson told Yahoo Finance.
Williamson also noted that input prices continued to rise in May, with manufacturers experiencing the largest cost increase in a year and a half.
“This last mile to target [inflation of 2%] is proving really frustrating,” Williamson said.
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