U.S. Business Activity Remains Stable as Iran War Drives Up Costs and Inflation Risks
U.S. business activity remained resilient in May, with stronger manufacturing performance helping offset weaker growth in the services sector. However, both industries faced mounting pressure from sharply rising input costs linked to the ongoing conflict involving Iran.
According to the latest flash data from S&P Global, the U.S. composite Purchasing Managers’ Index (PMI) held steady at 51.7 in May, matching April’s reading. Any figure above 50 signals economic expansion, indicating that overall business activity continues to grow despite geopolitical headwinds.
Manufacturing Strength Offsets Slower Services Growth
The manufacturing sector showed notable improvement during the month. The manufacturing output index climbed to 56.2, marking its highest level in 49 months and accelerating from April’s pace.
Meanwhile, the services sector — which represents the largest share of U.S. economic activity — slowed to 50.9, reaching a two-month low. The softer performance suggests consumer demand and service-related spending may be beginning to cool.
Middle East Conflict Weighs on Demand and Exports
Businesses across both sectors reported that growth in new orders remained subdued, largely due to the ongoing war in the Middle East. Export demand, in particular, was impacted as geopolitical uncertainty disrupted international trade activity.
At the same time, companies experienced the fastest rise in input costs since late 2022. Analysts attributed the increase to supply chain disruptions and surging energy prices following the closure of the Strait of Hormuz.
Strait of Hormuz Disruptions Push Oil Prices Higher
The Strait of Hormuz, located near Iran’s southern coastline, is one of the world’s most important energy shipping routes, carrying roughly 20% of global oil supplies. Since conflict escalated in late February, access through the passage has been severely restricted.
The disruption has triggered a sharp increase in oil prices, intensifying concerns that inflationary pressures could spread more broadly across the global economy.
Rising Costs Fuel Job Cuts and Price Increases
Businesses indicated that higher operating costs were affecting profitability and weighing on sales. Elevated expenses also contributed to increased job reductions and stronger selling-price inflation, which reached its highest level since August 2022.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said the economic impact of the Middle East conflict is becoming increasingly visible in business surveys.
He noted that May’s PMI figures showed only modest growth, as demand weakened further under rising prices while firms reduced hiring amid concerns over costs and the wider economic outlook.
Williamson added that demand could slow even more in the coming months, raising fears of stagflation — an economic environment characterized by sluggish growth combined with persistently high inflation.
Federal Reserve Rate Expectations Remain in Focus
Concerns over inflation have also influenced financial markets. Investors increasingly expect the U.S. Federal Reserve to prioritize controlling inflation, potentially keeping interest rates elevated or considering further tightening.
U.S. Treasury yields have risen sharply in recent sessions. The 30-year Treasury yield, often viewed as an indicator of long-term fiscal and geopolitical risk, recently climbed to 5.133%, retreating slightly after reaching its highest level since 2007 earlier this week.
Analysts at Vital Knowledge stated that while May’s PMI headline numbers appeared relatively stable, the underlying details pointed to a more negative economic outlook.
