US manufacturing growth set to cool as stockpiling fades, inflation risks rise: Report

U.S. manufacturing's current strength may be masking a fragile near-term outlook, with growth anticipated to decelerate once stockpiling activities subside and inflation pressures intensify, according to a report by S&P Global. While the headline Purchasing Managers' Index (PMI) reached a four-year high, driven by robust factory production for two consecutive months, this growth is largely attributed to companies building inventories amid concerns over rising prices and supply difficulties.

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The headline PMI has hit a four-year high, with strong factory production growth for a second successive month.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that this stockpiling, evident in May, makes it challenging to accurately assess the underlying health of the manufacturing economy. He warned that growth is likely to cool once this stock build concludes. Furthermore, a significant jump in producer costs signals that broader economy inflation is poised to rise further in the coming months.

The seasonally adjusted S&P Global US Manufacturing PMI increased to 55.1 in May from 54.5 in April, marking the highest level since May 2022 and extending a streak of readings above 50 for ten consecutive months. Production growth was the primary driver, expanding at its fastest pace since April 2022. New orders also saw a marked increase, though growth was softer than in April and primarily fueled by clients building inventory in anticipation of price hikes and potential delays.

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But since the outbreak of war in the Middle East we have seen production and demand buoyed by stock building as companies worry over rising prices and supply difficulties. This stockpiling was again widely evident in May and makes it hard to take an accurate reading on the underlying health of the manufacturing economy, as growth will cool once this stock build has run its course.

However, exports declined for the eleventh month in a row, impacted by geopolitical instability and tariffs. Stock building was observed across the supply chain, with firms increasing finished goods inventories at the quickest rate since November and boosting purchasing activity to mitigate price increases and disruptions. Input costs rose at the fastest rate in nearly four years, driven by fuel and oil products, pushing the Input Prices index to its highest since July 2022. Supplier delivery times deteriorated significantly, exacerbated by the closure of the Strait of Hormuz. Manufacturers responded by increasing output charges at the steepest rate since September 2022. Employment saw a modest increase, the best in five months, but overall confidence softened to a four-month low due to geopolitical concerns and rising inflation.

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The resulting steep jump in producer costs sends a worrying signal that broader economy inflation has further to rise in the coming months.