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US flash PMI cools in May, S&P 500 extends losses as economic growth slows

US PMI Composite Output Index slows to 53.8 in May from 56 in April, hitting a four-month low; manufacturing sector growth eases to 57.5 from 59.2 and S&P 500 extends losses.

U.S. economic activity continued to cool in the second quarter, dampened by soaring price pressures, softening demand and deterioration in supplier delivery times. According to S&P Global, its Flash Composite Purchasing Managers’ Index, which combines manufacturing and services production data, fell to a preliminary reading of 53.8 in May from 56.0 last month, hitting its lowest mark since the start of the year when the omicron variant brought the recovery to a screeching halt. For general interpretation, any figure above 50 signals expansion while readings below that level indicate contraction.

Examining the results in more detail, the services PMI fell to 53.5 from 55.6 in April, disappointing expectations that had called for a more modest pullback to 55.2. Although demand conditions remained sturdy thanks to loosened pandemic restrictions, growth in the sector where most Americans work continued to moderate as a result of concerns over higher interest rates and consumers' reduced willingness to spend due to falling real incomes. Despite this deceleration, optimism among service sector firms increased on hopes that labor and supply shortages will ease and the retrenchment in customer demand will prove transitory.

Elsewhere, the May manufacturing PMI retreated to 57.5 from 59.2, in line with consensus expectations. It is true that the slowdown raises concerns, but the pace of growth remained solid on account of a steep rise in production and new orders, and afaster upturn in employment. Overall, the goods-producing sector, which accounts for roughly 12% of GDP, maintained a steady expansion, but confidence dropped to a seventh month low amid a significant increase in cost burdens.

May PMI data

In summary, May PMIs suggest that U.S. economic activity is losing strength, but are still indicative of annualized GDP growth of approximately 2%, a sign that the economy is not about to go off the cliff as many Wall Street analysts predict. Healthy output expansion, solid employment numbers and unrelenting cost pressures for U.S. businesses suggest that the Federal Reserve will have to continue to removing policy accommodation over the coming months to meet its mandate. This may be problematic for risk assets, especially if GDP decelerates more than anticipated.

Immediately after the PMI survey crossed the wires, the S&P 500 extended session's losses, dropping more than 2% on the day. While the sharp sell-off is partly related to weakness in the technology sector triggered by Snap's poor outlook, the rapid slowdown in economic growth is also contributing to the negative sentiment.

S&P 500 five-minute chart


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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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