U.S. business activity increased to a 13-month high in May, lifted by strong growth in the services sector, the latest indication that the economy regained momentum early in the second quarter despite rising risks of a recession.
S&P Global said on Tuesday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to a reading of 54.5 this month. That was the highest level since April 2022 and followed a final reading of 53.4 in April. It was the fourth straight month that the PMI remained above 50, indicating growth in the private sector.
The survey data, which was collected between May 12-22, added to data this month that showed labor market resilience, with job growth accelerating in April and the unemployment rate falling back to a 53-year low of 3.4%. Retail sales excluding motor vehicles, gasoline, building materials and food services rebounded strongly, while production at factories and homebuilding picked up.
The upbeat reports prompted the Atlanta Federal Reserve to raise its second-quarter gross domestic product estimate to a 2.9% annualized rate from a 2.6% pace. The economy grew at a 1.1% rate in the first quarter.
Most economists expect a recession in the second half of this year, citing the 500 basis points worth of interest rate increases from the Federal Reserve since March 2022, when the U.S. central bank embarked on its fastest monetary policy tightening campaign since the 1980s to quell inflation.
Tightening credit conditions and a stand-off over raising the federal government's borrowing cap have also raised the risks of a downturn.
The survey's measure of new orders received by private businesses jumped to 54.3 this month, the highest reading since last May, from 51.9 in April. The services sector drove the increase, keeping services inflation elevated. Price pressures at factories eased. The survey's measure of prices paid by businesses for inputs slipped to 58.5 from 61.2 in April.
"Whereas manufacturing prices spiked higher during the pandemic due to strong demand and deteriorating supply, it is now the service sector's turn to be hiking prices amid resurgent demand and an inability to cope with order inflows due to a lack of capacity," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Businesses also increased headcount, with companies reporting that vacancies were being more easily filled.
The survey's flash services sector PMI rose to 55.1, also a 13-month high, from 53.6 in April. Economists polled by Reuters had forecast the services PMI would fall to 52.6. Its flash manufacturing PMI dropped to 48.5 from 50.2 in April.
Economists had forecast that index would be at 50. New orders fell after expanding in April for the first time in six months, with manufacturers reporting that customers were focused on working through current inventory. Manufacturers were, however, upbeat about business conditions over the next year.
A measure of prices paid by factories for inputs fell below 50 for the first time in three years.
