Economic Growth Faces New Challenges
Business activity in the United States moderated in May, as elevated prices weakened demand for services and global supply chain issues disrupted factory production. According to S&P Global’s flash US Composite PMI Output Index, which monitors both manufacturing and services sectors, the reading fell to 53.8 from April’s 56.0. Although still above the 50-mark that indicates expansion, this represents the slowest growth in four months.
S&P Global attributed the slowdown to persistent inflationary pressures, worsening supplier delivery times, and weaker demand growth. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that businesses are facing challenges from rising living costs, higher interest rates, and fears of an economic slowdown.
Sectoral Insights and Economic Impact
Manufacturing PMI eased to 57.5 from April’s 59.2, consistent with forecasts, while factory output dropped to 55.2 from 57.6. Reports highlighted material shortages and delayed supplier deliveries, with backlogs of unfinished work increasing as a result. China’s Covid-19 lockdowns, including the shutdown of Shanghai, a key supplier of raw materials, further aggravated supply disruptions.
Meanwhile, services PMI declined to 53.5 from 55.6, falling short of expectations. The services sector, which constitutes over two-thirds of US economic activity, has been particularly impacted by inflation and changing consumer behaviour.
Despite these challenges, factories continued hiring, and manufacturing accounts for 12% of the economy. However, input prices surged, with the index for costs paid by manufacturers rising to 84.9 in May from 81.9 in April.
Inflation and Monetary Policy Outlook
With consumer prices growing at their fastest rate in four decades, the Federal Reserve has adopted an aggressive stance on monetary policy, raising interest rates since March. These measures aim to curb inflation but have raised concerns about a potential recession in 2025.
The flash composite new orders index also dropped to 54.4 from April’s 56.6, reflecting subdued demand. Analysts warn that inflation, higher interest rates, and global uncertainties, including the Ukraine conflict and China’s Covid-19 policies, could weigh on future growth prospects.
Despite the slowdown, the PMI data suggests the economy remains on a growth trajectory halfway through the second quarter, even after contracting in the first quarter due to a record trade deficit. The combination of persistent inflation and supply chain challenges will be pivotal in shaping the economic outlook in the months ahead.
