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The US economic recovery shifted up a gear in May, with the PMI
covering the combined output of the manufacturing and service
sectors surging past all prior peaks by an impressive margin. The
strong correlation between the PMI and GDP means the economy looks
set to enjoy impressive - potentially double-digit - growth in the
second quarter.
Further robust expansion is indicated for the summer months, but
the survey's price gauges have also climbed to unsurpassed levels,
which will add to inflation worries. These unprecedented output and
price growth rates will inevitably lead to speculation about an
earlier than previously expected tapering of Fed policy.
The IHS Markit US composite PMI, covering both manufacturing and
services, showed one of the largest jumps on record in May, surging
to a new high in the survey's 12-year history. At 68.7, up from
April's prior record of 63.5, the latest reading is well above any
level previously recorded by the survey (the survey's prior peak of
61.0 was seen in June 2014).
The steep rise in the PMI is consistent with GDP growth
accelerating sharply in the second quarter, with annualised growth
in double digits indicated by the latest numbers and around 7-8%
signalled by the April-May average.
While manufacturing continued to report further solid growth,
it's the service sector that led the acceleration of the economy in
May, as business activity surged at a pace far in excess of all
previous highs.
An improving order book situation meanwhile bodes well for
strong growth to persist through the summer. New order inflows
measured across both manufacturing and services hit by far the
highest on record. Backlogs of uncompleted orders also continued to
expand at one of the fastest rates in the survey's history,
suggesting firms have a strong pipeline of work to ensure
workforces are kept busy in the coming months.
The surging growth of output and new orders was linked to a
number of factors. Most commonly, firms reported that the easing of
pandemic related restrictions both at home and abroad helped boost
business volumes. The vaccine roll-out meanwhile also helped boost
confidence, likewise both at home and in many overseas markets. The
releasing of pent-up demand was also reported, unleashing spending
that had been withheld over the prior year. Finally, stimulus
measures - especially fiscal support - were reported to have helped
drive expansion, notably in consumer-facing markets.
The combination of strong current demand, a solid pipeline of
existing orders and elevated business confidence helped sustain
strong jobs growth in May, albeit with the rate of employment
growth slowing slightly, often linked to difficulties filling
vacancies (and partly explaining the rise in backlogs of work).
However, the May survey also showed price pressures continuing
to build, with all gauges of input costs and selling prices hitting
new survey highs by some margin. While manufacturing saw the
steepest price pressures, service providers also reported
unprecedented growth of input costs and prices charged.
These price rises look set to feed through to higher consumer
price inflation in coming months, the annual rate of which had
already jumped to 4.2% in April.
While the FOMC expects the jump in inflation to be temporary,
any stickiness will inevitably lead to speculation that policy
taper-talk may soon intensify, especially given the recent elevated
PMI output reading. Historical comparisons with prior FOMC policy
changes underscore how the PMI is firmly in traditional policy
tightening territory.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
