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The IHS Markit flash composite PMI, which measures activity in services and manufacturing combined, rose from 27.0 in April to 36.4 in May according to the latest IHS report. The services PMI rose from 26.7 to 36.9, and the manufacturing PMI rose from 36.1 to 39.8. Overall, the report indicates that the private sector contracted at a slower rate in May with the reopening of some parts of the US economy.

Key Takeaways

• The composite flash PMI came in at 36.4, slightly above expectations.
• The report described the fall in output in May as “substantial,” citing “marked declines in client demand” for both services and manufacturing.
• May still marked the second-worst decline in the series since records began in 2009.

While the rate of contraction among goods producers and service providers slowed down, it remains near historic highs with only small portions of the US economy currently operational compared to pre-lockdown times. Companies reported significantly decreased demand for goods and services in May. Demand among overseas clients saw a particularly sharp drop, and the lower demand was reflected in payrolls as businesses cut their workforce at a market pace.

 U.S. IHS MARKIT MAY FLASH COMPOSITE PMI AT 36.4 (VS 27.0 IN APRIL)

U.S. IHS MARKIT MAY FLASH SERVICES PMI AT 36.9 (VS 26.7 IN APRIL)

U.S. IHS MARKIT MAY FLASH MANUFACTURING PMI AT 39.8 (VS 36.1 IN APRIL) pic.twitter.com/oHMsT6U1D8

— PiQ (@PriapusIQ) May 21, 2020

According to the report, “businesses remained pessimistic towards the outlook for output over the coming year as the pandemic’s impact was extended. Although some became more confident of a pick-up in the later stages of the year, helping lift the survey’s future expectations index from April’s all-time low, others noted it would take a long time for conditions to normalize.”

Services

Service companies cut output prices in an effort to drum up new business and retain existing customers, although some noted that their prices dropped to reflect falling input prices as well. Sales fell at the second-steepest rate in history, second only to the prior month. The service industry has been hit especially hard due to the in-person nature of many services being impacted by lockdown procedures.

Manufacturing

The report pointed to a “further substantial deterioration in operating conditions” in May, led by major contractions in production and new orders. Backlogs fell further, with less work to do throughout the industry, and this led to an increase in spare capacity. Employment has reduced at a historically sharp pace in the industry with furloughs, layoffs, and reduced hours.

Like in the services industry, many manufacturers reduced prices to compensate for the reduced purchasing power of their clients amid the ongoing financial crisis. The report comes shortly after the release of the Philadelphia Fed manufacturing index which showed ongoing sharp contraction in the region.

Market Reaction

Gold prices have continued to face strong selling pressure in today’s session. Spot gold last traded at $1,727.87/oz, down -1.06% with a high of $1,753.08/oz and a low of $1,725.00/oz. Testing the lower bounds of today’s range, the dip in spot gold may reflect a natural pullback from yesterday’s gains in the absence of major market-moving news throughout today’s session.