US economic output hits 2-year high

The US economy is defying expectations amid concerns of a slowdown.

S&P Global's flash US composite PMI, which captures activity in both the services and manufacturing sectors, came in at 54.4 in May, up from 51.3 in April. Economists had expected the index to remain largely unchanged in May. Instead, it hit a 25-month high.

Both the services and manufacturing sectors were in expansion mode, with services driving most of the gains for the composite index. The services component of S&P's report showed the index registered 54.8 this month, up from 54.2 in April. Manufacturing activity hit a reading of 50.9, up from 50 in April.

Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.

“The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signaling the fastest expansion for just over two years in May," S&P Global Market Intelligence chief business economist Chris Williamson wrote in the release. "The data put the US economy back on course for another solid GDP gain in the second quarter."

Other recent data had indicated the economy is cooling. The April jobs report showed fewer job additions than expected and a pickup in the unemployment rate, while the preliminary reading of first quarter GDP showed the US economy grew at a slower pace than initially thought.

Largely, the market had digested that data as a welcome sign for the Fed's fight against inflation. On Thursday, the hot PMI reading sent stocks to their lows of the session while the 10-year Treasury yield (^TNX) quickly added 3 basis points to hit 4.46%. Notably, the interest rate-sensitive Russell 2000 (^RUT) turned negative after the print, falling more than 0.5%.

"[Services] is obviously a very interest rate [sensitive] part of the economy, and that acceleration in growth is clearly one that is going to worry the central bank in particular that you've got some building demand pressures here in the economy again," Williamson told Yahoo Finance.

Williamson noted that input prices continued to rise in May. Manufacturers saw the largest cost increase in a year and a half.

"This last mile to target [inflation of 2%] is proving really frustrating," Williamson said.

Jul 3, 2019; Los Angeles, CA, USA; United States flags fly at Dodger Stadium before the game between the Arizona Diamondbacks and the Los Angeles Dodgers. Mandatory Credit: Kirby Lee-USA TODAY Sports
United States flags fly at Dodger Stadium before the game between the Arizona Diamondbacks and the Los Angeles Dodgers. (Kirby Lee-USA TODAY Sports) (USA TODAY Sports / Reuters)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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