Why This Matters to Distributors: Manufacturing is expanding, but the upturn rests on front-loaded inventory buying, not sustained end-market demand. Near-term order volume may hold. Whether it carries into the third quarter depends on whether end-market consumption catches up to current production levels before cost-driven inflation squeezes the buyers manufacturers serve.
U.S. manufacturing output reached its highest level in four years in May as factory activity accelerated, but surging input costs tied to the Middle East war and a slowing service sector signal a more complex demand environment for wholesale distributors heading into summer.
The S&P Global Flash U.S. Manufacturing PMI rose to 55.3 in May, up from 54.5 in April, its highest reading since May 2022. The flash U.S. Manufacturing Output Index climbed to 56.2, a 49-month high. The headline S&P Global U.S. Composite PMI Output Index, covering both manufacturing and services, held steady at 51.7, matching April’s reading.
“The damaging economic impact from the war in the Middle East is becoming increasingly evident in the business surveys,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook.”
The manufacturing expansion was not uniformly demand driven. New order growth was purely domestic, with goods exports falling again in May. Order books grew at the second fastest pace in four years, but the influx in part reflected precautionary stock building by clients rather than organic end-market demand. Supplier delivery times lengthened to the greatest degree since August 2022 as war-related shipping disruptions compounded existing tariff-related supply constraints. Factory input inventories rose at their steepest pace since April 2022.
Input costs intensified sharply. Manufacturing input price inflation surged to its highest since November 2022, driven by war-related supply constraints and rising energy costs. Average prices charged for goods and services rose at the fastest rate since August 2022. Goods prices registered their largest monthly increase since September 2022.
The services sector told a divergent story. The flash U.S. Services PMI Business Activity Index registered 50.9, a two-month low. Service sector employment fell at the second-fastest pace since May 2020. Service providers reported subdued demand tied to rising prices and uncertainty, particularly among consumer-facing businesses. Service exports fell to the sharpest rate in six years. Williamson said the May data indicates the economy will struggle to manage annualized GDP growth of much more than 1% in the second quarter.
Employment reflected the sector split. Manufacturing payrolls posted their largest increase in 11 months as factories raised headcounts to meet rising orders. Overall employment, however, fell for the second time in three months, with job losses reaching their highest rate since August 2024.
The cost environment compounds distributor planning challenges. Input prices rising at the steepest pace in more than three years will pass through to distributor procurement costs, compressing margins unless increases can be passed downstream. The combination of war-related energy costs, tariff-driven supply constraints and lengthening lead times mirrors the conditions that pressured distributor operations through 2021 and 2022.
Williamson noted that over the past three months, order book growth has slowed to its weakest in two years. The precautionary inventory build that has partially supported factory output will not continue indefinitely. Service sector business optimism fell to its weakest since April 2025, the second lowest since October 2022. Manufacturer optimism, by contrast, reached its highest since February 2025, driven by expectations around tariff-related reshoring.
Final May PMI data for manufacturing is scheduled for release June 1.
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