U.S. manufacturing conditions improved significantly in May, with production growing at its fastest pace since April 2022, according to the latest S&P Global Purchasing Managers Index (PMI) report.
New orders increased markedly again, but growth in both output and sales was in part driven by inventory stockpiling as businesses sought to protect themselves from supply chain disruption and steeply rising prices caused by the war in the Middle East.
Manufacturing input costs rose at a rate unmatched in nearly four years, while supplier delivery times slowed to the greatest extent since August 2022. Confidence in the outlook also softened since April but remained sufficiently positive to help explain a rise in employment.
The seasonally adjusted S&P Global US Manufacturing PMI, a key economic indicator of the health of the manufacturing sector, recorded 55.1 in May. That was up from 54.5 in April and, therefore, signaled a stronger rate of expansion in the manufacturing economy.
The latest index reading was the highest since May 2022 and has now posted above the critical 50.0 no-change mark for 10 successive months. A PMI above 50 indicates expansion, while a reading below 50 means the sector is contracting or shrinking.
"At first glance, the manufacturing sector seems to be firing on all cylinders but lift the hood and the picture is not so clear,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said June 1.
"The headline PMI has hit a four-year high, with strong factory production growth for a second successive month in response to a further marked upturn in order books, but since the outbreak of war in the Middle East we have seen production and demand buoyed by stock building as companies worry over rising prices and supply difficulties,” Williamson said.
"This stockpiling was again widely evident in May and makes it hard to take an accurate reading on the underlying health of the manufacturing economy, as growth will cool once this stock build has run its course,” he added.
"The incidence of supply chain delays is the highest since August 2022, with the buying of safety stocks not only adding to the supply squeeze from the closure of the Strait of Hormuz but also pushing prices higher for a wide variety of inputs, Williamson said. “The resulting steep jump in producer costs sends a worrying signal that broader economy inflation has further to rise in the coming months."
