Quick Overview

  • S&P Global said on Thursday that damage from the war with Iran is increasingly prominent in U.S. corporate surveys, with rising inflation pressuring economic growth, employment, and business outlooks.
  • S&P Global's May composite Purchasing Managers' Index showed manufacturing and services both saw sluggish growth for a second consecutive month. Manufacturers saw new orders rise due to "precautionary inventory accumulation," with optimism reaching its highest level since February 2025; however, services sector optimism fell to its lowest level since April 2025.
  • Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said in a statement that "the steady growth in orders driven by concerns over further price increases and supply delays will not last," and "the disruptive impact of the Middle East war is becoming increasingly evident."

In-Depth Analysis

Rising price pressures from the war prompted most Federal Reserve officials at last month's meeting to indicate that higher interest rates may be needed to bring inflation down to the 2% target level. This information came from the minutes of the April meeting released on Wednesday.

According to the CME Group's FedWatch tool, interest rate futures traders see a 52.8% probability that policymakers will raise rates by at least 25 basis points this year. A month ago, they had expected no rate hikes.

Philadelphia Fed President Anna Paulson said in a speech on Tuesday that market expectations for rate hikes are reasonable given rising price pressures. She noted that before policymakers met last month, "the market had expected a possible rate cut this year." Paulson said, "Recently, expectations have shifted toward considering the possibility of rates staying unchanged or even moderately tightening." She added, "The way markets have reacted to economic news over the past few months is broadly consistent with my thinking."

Data released by the U.S. Bureau of Labor Statistics last week showed the May Consumer Price Index surged 3.8% year-over-year, a three-year high. Energy prices rose 17.9% over the past year, gasoline prices rose 28.4%, and fuel oil prices rose 54.3%.

Richmond Fed President Tom Barkin said on Thursday that the energy shock and inflation running above the Fed's 2% target for five years could undermine the stability of long-term inflation expectations. In his remarks, he said, "Looking ahead, I wouldn't be surprised if we continue to see rough waters that pressure our employment goals, our inflation goals, or both. If that happens, the Fed is fully capable of responding appropriately."

Williamson said the U.S. economy may struggle to grow at an annualized rate above 1% in the second quarter. "Even this modest pace of growth may not last," he said. Williamson also noted, "The pace at which business costs are rising is unprecedented since the 2022 energy price shock and is being passed on to consumers in the form of significantly higher selling prices. Therefore, the survey's price indicators suggest inflation could rise further even as the economy cools."