U.S. Manufacturing Activity Hit A Four-Year High in May, But There’s a Caveat

U.S. manufacturing activity rose to its highest level in four years in May amid rising costs, supply disruptions and uncertainty tied to the war with Iran, according to new data.

The S&P Global flash U.S. manufacturing purchasing managers’ index climbed to 55.3 in May from 54.5 in April, marking the strongest reading since May 2022. A reading above 50 indicates expansion.

The gain, however, was driven largely by manufacturers building inventories to protect against potential shortages and higher prices. S&P Global’s survey showed input inventories rose to an 11-month high, while supplier delivery times worsened, a pattern consistent with companies buying ahead of possible supply chain problems.

However, S&P Global said cost pressures intensified, with factory input costs reaching their highest level since June 2022. Companies also raised output prices, suggesting that some of those higher costs may eventually reach consumers.

The broader economy also looked softer than the headline manufacturing figure. S&P Global’s flash composite PMI, which tracks manufacturing and services, held at 51.7 in May. The services PMI slipped to 50.9 from 51.0, barely above contraction territory. Manufacturing employment rose modestly, but overall private-sector employment fell to its lowest level in 21 months, largely because of weaker services hiring.

Chris Williamson, chief business economist at S&P Global Market Intelligence, told Reuters that the reading indicated “that the economy will struggle to manage annualized GDP growth of much more ​than 1% in the second quarter.” He also cautioned that inventory accumulation tied to supply concerns is not a durable engine for expansion.

“On average, over the past three months order book growth has slowed to its weakest for two ⁠years, ​and a boost from precautionary stock building due to concerns over ​further price hikes and supply delays will not last forever,” said Williamson.

Manufacturing represents a smaller share of the U.S. economy than services, but remains closely watched because it is sensitive to global demand, shipping costs, commodity prices, and business confidence. The sector accounts for about 9.4% of the economy, according to the National Association of Manufacturers, so its strength alone may not be enough to offset weakness in services.