US manufacturing activity rises to four-year high in May, S&P Global survey shows

By Lucia Mutikani

WASHINGTON, May 21 (Reuters) - U.S. manufacturing activity strengthened in May, scaling the highest level in four years, as businesses boosted inventories to guard against potential shortages and rising prices related to the war with Iran.

S&P Global said its flash manufacturing PMI increased to 55.3 this month, the highest reading since May 2022, from 54.5 in April. A reading above 50 indicates growth in manufacturing, which accounts for 9.4% of the economy. Economists polled by Reuters had forecast the manufacturing PMI easing to 53.8.

The nearly three-month long U.S.-Israeli conflict with Iran has disrupted shipping in the Strait of Hormuz, raising energy prices, as well as straining global supply chains and causing shortages of a wide range of goods, including fertilizers, aluminum and consumer products.?

The rise offset a moderation in the flash services PMI to 50.9 from 51.0 in April. That left the S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, unchanged at 51.7.

S&P Global Market Intelligence chief business economist Chris Williamson said the reading indicated "that the economy will struggle to manage annualized GDP growth of much more than 1% in the second quarter."

FACTORIES BUILDING SAFETY STOCKS

S&P Global said though new order growth at factories slowed, input inventories increased to an 11-month high, attributed to "the building of safety stocks amid price and supply worries."?

Its measure of supplier delivery times lengthened to levels last seen in August 2022. Prior to the war, suppliers were being constrained by President Donald Trump's sweeping tariffs.

With supplier performance deteriorating, a measure of prices paid by factories for inputs jumped to 79.5, the highest reading since June 2022, from 68.4 in April. Manufacturers also passed on the higher costs to consumers. The survey's gauge of output prices rose to 63.3, the highest level since September 2022, from 61.7 in April.

Its overall measure of prices paid by businesses for inputs increased to 64.0, the highest reading since November 2022, from 61.3 in April. That suggests a further acceleration in inflation is coming. Producer inflation increased by the most in four years in April, while consumer prices posted their biggest year-on-year gain since May 2023. But higher prices could weigh on demand and undercut economic growth.

"On average, over the past three months order book growth has slowed to its weakest for two years, and a boost from precautionary stock building due to concerns over further price hikes and supply delays will not last forever," said Williamson.

The survey's gauge of manufacturing employment rebounded this month, but services sector employment contracted. A measure of overall private-sector employment fell to a 21-month low.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama )