Whalesbook
Manufacturing Surges, Services Contract
The U.S. economy showed a stark contrast in May, with manufacturing activity reaching a 48-month high while the services sector contracted. This divergence highlights underlying tensions, as factories experienced a strong rebound driven by restocking and production, yet the services sector faced increasing costs and weakening demand.
Manufacturing Output Accelerates
The U.S. manufacturing Purchasing Managers' Index (PMI) climbed to 55.3 in May, the highest since May 2022. This expansion was fueled by the fastest output growth in over two years and the strongest job creation since June 2025. New orders also showed strong growth, with businesses increasing inventories in anticipation of potential price hikes and supply chain issues. Supplier delivery times lengthened significantly, a trend not seen since August 2022.
Services Sector Slips as Costs Rise
Conversely, the services sector's Business Activity Index fell to a two-month low of 50.9 in May. This decline contributed to the overall U.S. Composite PMI holding steady at 51.7, indicating mixed private sector performance. Service providers saw input costs rise at their fastest pace in a year, leading to increased selling prices. Muted demand for new projects prompted firms to cut jobs at the quickest rate since May 2020, and business optimism in the sector dropped to a one-year low.
Middle East Conflict's Economic Toll
The ongoing conflict in the Middle East is significantly impacting economic demand and costs. Export sales have suffered, while war-related supply constraints and rising energy prices have intensified input cost inflation. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, described the conflict's