WASHINGTON (Reuters) - U.S. business activity accelerated to the highest level in just over two years in May, but manufacturers reported a surge in prices for a range of inputs, suggesting that goods inflation could pick up in the months ahead.
S&P Global said on Thursday that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.
A reading above 50 indicates expansion in the private sector. Economists polled by Reuters had forecast the index little changed at 51.1. The increase was driven by the services sector, with the flash PMI rising to 54.8 from 51.3 in April. The manufacturing flash PMI inched up to 50.9 from 50.0.
At face value, the jump in activity suggested that economic growth picked up half-way through the second quarter.
Gross domestic product increased at a 1.6% annualized pace in the January-March quarter, largely held back by a surge in imports to meet strong domestic demand.
So-called hard data for April, including retail sales, housing starts and permits as well as industrial production have suggested that the economy lost further momentum early in the second quarter. The labor market is also slowing.
"Business confidence has lifted higher to signal brighter prospects for the year ahead," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "However, companies remain cautious with respect to the economic outlook amid uncertainty over the future path of inflation and interest rates, and continue to cite worries over geopolitical instabilities and the presidential election."
The S&P Global survey's measure of new orders received by private businesses increased to 51.7 this month from 49.1 in April. Its measure of employment contracted for a second straight month, though the pace of decline moderated.
Businesses faced higher prices for inputs. The manufacturing input prices index vaulted to the highest level in one-and-a-half years amid reports of higher supplier prices for a wide variety of inputs, including metals, chemicals, plastics and timber-based products as well as energy and labor costs. That would suggest goods disinflation is close to running its course.
Higher staffing costs also raised costs for services businesses. Companies sought to pass higher costs onto customers by increasing selling prices.
"What's interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Federal Reserve's 2% target still seems elusive," said Williamson.