US Business Activity Surges in Early May, Driven by Stronger Service Providers and Inflationary Pressures

US business activity surged in early May at the fastest pace in two years, driven mainly by stronger growth at service providers and accompanied by a pickup in inflation. The S&P Global flash May composite purchasing managers index jumped by over 3 points to 54.4, the highest level since April 2022. This figure indicates expansion as readings above 50 signify growth. Despite lackluster April retail sales and a reduction in factory output, recent data showed a less than inspiring start to the quarter. However, growth in activity at service providers this month was the fastest in a year, and manufacturing output expanded at a faster rate.

The Federal Reserve aims to maintain higher interest rates for an extended period due to strong demand making it challenging for inflation to cool down. The report revealed that factory input prices rose at the quickest rate since November 2022, and prices-paid and received metrics for service providers also saw an uptick. Overall, the data indicates a robust increase in business activity, pointing towards a strengthening economy with persistent inflationary pressures.

Strong demand is making it challenging for inflation to cool down as manufacturing output expands at a faster rate than services. The S&P Global composite measure of input prices climbed to the second-highest level since September, while the group’s indicator of prices charged also increased. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that inflationary pressures are now predominantly coming from manufacturing rather than services. Both sectors are experiencing elevated rates of inflation for costs and selling prices compared to pre-pandemic levels.

Inflation has become more difficult to control due to strong demand making it challenging for companies to keep up with supply chain disruptions caused by Covid-19 restrictions and shortages of labor and materials.

Achieving the Fed’s target of 2% inflation still seems elusive due to these challenges.

In conclusion, US business activity accelerated in early May due mainly to stronger growth at service providers and accompanied by a pickup in inflationary pressures across different sectors of the economy. The Federal Reserve aims to maintain higher interest rates for an extended period due to persistent inflationary pressures that threaten economic stability if not addressed promptly and effectively.