U.S. Economy Picks Up Speed, Defying Fed Attempts To Cool Inflation and Growth

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The U.S. economy got a major boost in May, according to the latest S&P surveys. Businesses are feeling good about the future, even with inflation still causing headaches.

The S&P flash U.S. services index, which is based on a survey of purchasing managers’ at U.S. businesses, shot up to a 12-month high of 54.8 in May from 51.3 in April. These are the folks buying supplies for their companies, so this is a big deal.

Not to be outdone, the flash U.S. manufacturing PMI climbed to 50.9 in May from 50.0. Anything above 50 means growth, so it looks like things are picking up.

“The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signalling the fastest expansion for just over two years in May,” said S&P Global’s top economist, Chris Williamson.

New orders bounced back in May after dipping in April, a first since the end of last year. But when it comes to jobs, it’s a mixed bag. Manufacturers are hiring, but the service sector is shedding jobs largely because a tight labor market is making hiring difficult.

Raw material costs shot up in May, keeping inflation high. Businesses are trying to pass these costs onto customers, meaning higher prices for everyone.

The resurgence of growth following the return of rising inflation is likely to mean the Fed will have to continue to hold off on cutting interest rates. Minutes of the Fed’s last meeting that were released on Wednesday showed Fed officials believe the economy will need to slow down in order for inflation to come down to its two percent target.

“Selling price inflation has meanwhile ticked higher and continues to signal modestly above-target inflation. 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 Fed’s 2 percent target still seems elusive,” Williamson said.

After a big growth spurt in the second half of 2023, the economy slowed a bit but isn’t losing as much steam as many expected. Low unemployment and rising wages are keeping consumer spending strong, fending off recession fears.

“The data put the U.S. economy back on course for another solid gain in gross domestic product in the second quarter,” Williamson said.


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