U.S. business activity rebounded in May, offering a sign of renewed economic energy, but that optimism was tempered by fresh signs of inflationary strain, according to data from S&P Global’s flash Composite Purchasing Managers’ Index (PMI). The index, a key gauge of private-sector health, climbed to 52.1 after dipping to a 19-month low of 50.6 in April. Any reading above 50 indicates expansion.
Both the manufacturing and services sectors contributed to the upturn, with manufacturing improving to 52.3 from 50.2, and services rising to 52.3 from 50.8. The gains reflect stronger client demand and an increase in new orders. Employment trends also pointed in a positive direction, as firms added workers for a third consecutive month—a sign that business leaders were more confident in short-term conditions.
One factor helping to buoy sentiment was a temporary reduction in tariffs between the U.S. and China. A 90-day trade truce scaled back tariffs from 145% to 30%, encouraging businesses to place advance orders and stockpile inputs. This led to a rush in purchasing activity and pushed input inventories to an 18-year high as firms moved to take advantage of the limited window of tariff relief.
However, the outlook remains clouded by mounting cost pressures. Firms reported the steepest rise in input prices since November 2022, driven by increases in materials, energy, and wages. In response, companies passed those rising costs onto consumers, resulting in the fastest growth in output prices since August 2022. Manufacturers also reported worsening delivery delays, with lead times stretching to their longest in 31 months—a reflection of lingering supply chain issues.
The dual trends—improving output and intensifying inflation—pose a challenge to businesses and policymakers alike. On the one hand, the PMI data suggests a nascent recovery is taking shape. On the other, there is concern that rising costs could erode profit margins and dampen further growth. Analysts warn that persistent inflation, if unchecked, could constrain consumer demand and complicate the Federal Reserve’s ongoing efforts to steer the economy toward stable growth without triggering a recession.
Much will depend on whether the temporary trade reprieve leads to lasting improvements in global supply chains and whether inflationary forces begin to ease. The path forward is also likely to be shaped by monetary policy decisions in the months ahead. The Fed has kept interest rates elevated in an effort to cool inflation, but if price pressures persist, additional tightening could weigh on business confidence and investment.
The data from May offers a snapshot of an economy at a crossroads—showing resilience and potential momentum, but also grappling with structural cost challenges. The risk of stagflation, where inflation remains high even as growth slows, looms in the background. For now, businesses are trying to adapt, but the durability of the current rebound remains in question.
