Investing.com – U.S. business activity held steady in May, as an acceleration in manufacturing offset sluggishness in the services sector, while both industries grappled with a jump in input costs because of the Iran war.
S&P Global’s flash U.S. composite purchasing managers’ index for this month stood at 51.7, unchanged from the April reading. A reading above 50 indicates expansion.
The index tracking manufacturing industry output came in at 56.2, a 49-month high and faster than the preceding month. However, the gauge of services, which accounts for a bulk of overall U.S. economic activity, slipped to a two-month low of 50.9.
Both sectors flagged that order book growth had been somewhat subdued by the ongoing war in the Middle East, particularly in terms of export sales. At the same time, input costs in May surged at their steepest rate since late-2022, driven by supply constraints and an energy price shock caused by the closure of the Strait of Hormuz.
The strait, a vital waterway off of Iran’s southern coast through which roughly a fifth of the world’s oil traverses, has been all but shuttered since the start of the war in late February. Oil prices have soared as a result, fueling worries over a widespread spike in inflationary pressures.
Elevated input expenses were not only cited as a weight on sales but also a contributor to steepening job losses and a rise in selling price inflation to its highest level since August 2022.
“The damaging economic impact from the war in the Middle East is becoming increasingly evident in the business surveys,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, in a statement. “The ‘flash’ PMI data for May recorded only modest growth of business activity as demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook.”
Williamson added that demand “looks set to cool further in response to rising prices,” painting the picture of an economy mired in so-called “stagflation”: muted growth and stubborn inflation.
Expectations that the Federal Reserve could opt to focus on corraling inflation and raise interest rates have helped push U.S. Treasury yields sharply higher in recent days. The 30-year yield, seen as a metric of geopolitical and fiscal risk, was last up at 5.133%, easing back from its highest level since 2007 notched earlier this week.
“The U.S. flash PMIs for May were decent on the headline, but the details were net negative,” analysts at Vital Knowledge said in a note.