PMIs Serve Up Growth
May brought a surprising burst of vitality to the U.S. economy, with robust reports from the Institute for Supply Management (ISM) and S&P Global. This resurgence in economic activity makes it highly unlikely that the Federal Reserve will entertain any notion of cutting interest rates this year, despite the persistent murmurings from the Biden administration for a more lenient monetary stance.
The ISM Services Purchasing Managers Index (PMI), a key barometer of economic health, soared to 53.8 percent in May from a paltry 49.4 percent in April. This dramatic shift from contraction territory far exceeded economists’ expectations of a modest rise to 50.7 percent. With numbers above 50 percent signaling expansion, the service sector appears firmly back on a growth trajectory.
Driving this resurgence were strong new orders and a surge in export activity. New orders climbed to 54.1 percent from 52.2 percent in April, while export orders saw a dramatic increase to 61.8 percent from 47.9 percent. These gains reflect solid demand both domestically and internationally. This robust demand underscores the underlying strength of the U.S. economy, even as other sectors face challenges.
“The rebound in services activity is a clear sign that the economy is on solid footing,” said Anthony Nieves, chair of the ISM services survey committee. “We expect the second half of the year to be slightly better than the first.”
Nieves’ optimism contrasts sharply with the sentiment among economists who are forecasting a slower second half of the year.
A Manufacturing Sector Mystery
Things are a bit foggier when it comes to the manufacturing sector.
The resurgence of growth in the services sector stands in sharp contrast to ISM’s read of the manufacturing sector, where the ISM Manufacturing PMI report was rather dismal. The ISM Manufacturing PMI fell to 46.9 percent in May from 47.1 percent in April, marking the seventh consecutive month of contraction.
“The manufacturing side of the economy appears to have stalled,” said Timothy Fiore, chairman of the Institute for Supply Management’s manufacturing index.
On the other hand, the competing S&P Global Manufacturing PMI released Monday showed a more positive outlook and reading of activity in May. That report showed that new orders surged back to life in the U.S. manufacturing sector in May, fueling a robust uptick in production as the second quarter unfolded. Business confidence also got a boost, with optimistic forecasts for the sector’s future driving firms to ramp up hiring, increase purchasing activity, and stockpile finished goods in anticipation of sustained growth.
“It was pleasing to see new orders return to growth in May following a blip in April. Although modest, the expansion in new work bodes well for production in the coming months. In fact, manufacturers cited confidence in the future as a factor contributing to increases in employment, purchasing activity, and finished goods stocks,” said Andrew Harker, Economics Director at S&P Global Market Intelligence.
But S&P and ISM are united about the good news for the services sector. The S&P Global U.S. Services PMI hit a one-year high of 54.8 in May, reinforcing the narrative of a strong service sector.
“A return to growth of new business following April’s blip supported a marked strengthening of growth,” Harker said.
The S&P Global report also highlighted a surge in business activity and new orders, with many firms reporting increased demand from both domestic and international clients.
“This kind of growth is indicative of a healthy private sector,” Harker added, emphasizing the resilience and adaptability of U.S. businesses in navigating current economic conditions.
Inflation Risks Are Rising, Not Falling
However, Harker cautioned that inflation continues to cast a shadow.
“Cost pressures continued to build, however, with inflation on that front the strongest in just over a year. Although output prices rose at a slower pace in May, this is unlikely to be sustainable should cost burdens ramp up further in the months ahead,” Harker said in the manufacturing report from earlier this week.
And the situation is similar in services.
“Despite lower employment, wage pressures remained a key factor pushing up input costs, which increased sharply again in May and prompted a faster increase in selling prices, providing further evidence that inflation remains sticky,” Harker said in Wednesday’s services report.
While the Atlanta Fed’s GDPNow is currently showing the economy growing at just 1.8 percent, much of that is based on data from April. The more recent data, including jobless claims, housing construction spending, and the services PMIs, suggest that the economy has seen a revival of growth in May.
May’s economic rebound underscores the strength of the U.S. economy and diminishes the likelihood of the need for rate cuts this year. However, the Fed’s track record of managing inflation through this economic cycle has been far from perfect. It was late to act on inflation—and it backed off of hiking too early. As the political pressure from Democrats and the Biden administration for rate cuts continues to mount—and cries from Wall Street for a cut are getting louder—it will take serious resolve for the Fed to stay the course on rates.