May PMI data shows rebound, but rising inflation cloud outlook

US business activity showed signs of life in May 2025, with data indicating a modest yet noteworthy improvement across both manufacturing and services sectors. According to the S&P Global flash US Composite Purchasing Managers Index, overall activity rose to 52.1, marking its highest level in four months and suggesting expansion after several quarters of stagnation.

This uptick aligns closely with the announcement of a temporary truce between the US and China. As part of the deal, the Biden administration agreed to reduce certain tariffs from 145% to 30% over a 90-day period. This decision, aimed at defusing trade tensions that had plagued global markets, played a critical role in boosting corporate sentiment and order volumes across industries.

Manufacturers in particular reported a sharp rise in orders as firms ramped up procurement activities in anticipation of smoother trade conditions. However, while the truce offered relief, underlying challenges continue to cloud the horizon.

Manufacturing strength offset by service sector friction

The manufacturing sector led the resurgence in May, buoyed by renewed input demand and a race to build inventories. Yet delivery times for materials deteriorated, reaching their worst levels in 31 months. Suppliers cited port backlogs, transport disruptions, and rising compliance inspections as primary bottlenecks.

The services sector, in contrast, experienced mixed outcomes. Tourism and hospitality bookings declined, partly due to a drop in inbound travel following President Trump’s renewed immigration restrictions. The slowdown in high-value service exports highlighted the sector’s vulnerability to policy volatility and diplomatic friction.

Despite this, business expectations across service firms remained positive, largely thanks to domestic demand resilience and tentative corporate optimism linked to monetary policy stability.

Cost pressures climb as inflationary signals return

Perhaps the most pressing concern revealed by the May PMI report was the escalation of inflationary pressure. Input costs rose at their fastest pace since late 2022, with companies citing higher energy prices, wage pressures, and regulatory compliance costs. Output prices increased in parallel, suggesting that businesses are passing these costs through to consumers.

Inventories rose sharply, not merely due to stronger demand but as a hedge against possible supply chain disruptions. This preemptive stockpiling hints at deeper concerns within boardrooms about inflation persistence and market volatility heading into the second half of 2025.

These developments arrive at a time when the Federal Reserve is caught between controlling inflation and supporting slowing growth. Although the Fed maintained its benchmark rate in May, analysts suggest further tightening could be on the table if price indicators worsen.

With GDP growth forecast to dip below 1% this year and core PCE inflation projected to hit 3.5%, the US economy finds itself navigating a delicate balancing act. Policymakers face the dual challenge of sustaining business momentum while curbing runaway costs.

The PMI data reinforces a growing narrative that the US could face a period of stagflation, a scenario marked by stagnant growth and elevated inflation. While May’s business revival is a welcome sign, it is far from a guarantee of sustainable recovery.

Sources:
Reuters