US Economy Output Surges to Two-Year High With Surprising Growth

The U.S. economy has outpaced expectations, showing resilience despite widespread concerns of a potential slowdown. According to S&P Global’s Flash U.S. Composite PMI, which measures activity in both the services and manufacturing sectors, the index rose to 54.4 in May from 51.3 in April. This unexpected increase marks the highest level in 25 months, defying economist predictions that anticipated little change.

The services sector played a significant role in driving this growth, with its component of the PMI rising to 54.8 from 54.2 in April. Manufacturing activity also showed positive movement, climbing to 50.9 from 50 in the previous month. These readings are crucial, as any value above 50 indicates expansion, while values below 50 signal contraction.

This uptick in economic activity comes after a period of slower growth, signaling a robust turnaround. S&P Global Market Intelligence’s chief business economist noted that the data suggest the U.S. economy is poised for another strong GDP gain in the second quarter, building on this renewed momentum.

Contrary to the recent PMI data, other indicators had suggested a cooling economy. April’s jobs report revealed fewer job additions than anticipated, coupled with a rise in the unemployment rate. Additionally, the preliminary GDP reading for the first quarter showed slower growth than initially estimated. These signs of a cooling economy were generally seen as positive in the context of the Federal Reserve’s ongoing battle against inflation.

However, the latest PMI figures have shifted market dynamics. Following the release of the hot PMI data, stocks experienced a downturn, with the 10-year Treasury yield rising by 3 basis points to reach 4.46%. The interest rate-sensitive Russell 2000 index also turned negative, dropping over 0.5%.

The surge in the services sector, which is particularly sensitive to interest rates, raises concerns about increasing demand pressures. This development could pose challenges for the Federal Reserve as it seeks to control inflation. The rise in input prices continued in May, with manufacturers experiencing the largest cost increases in 18 months, further complicating the Fed’s efforts to reach its 2% inflation target.