Growth of private sector business activity slowed in May. The flash composite output index weighed in at 53.3, a couple of ticks short of the market consensus and down from April's final 54.1. The latest reading was a 3-month low.

As already reported in both France and, in particular, Germany, economic expansion was again wholly attributable to services where the flash sector PMI slipped from April's final 56.2 to a still very respectable 55.9. By contrast, the contraction in manufacturing continued to accelerate with the flash sector PMI declining from April's final 45.8 to only 44.6, a 36-month low.

Aggregate new orders just about kept their head above water but this masked a faster decline in manufacturing. As it is, manufacturing output would have fallen even more steeply but for a further rundown in backlogs. Overall employment continued to expand at a healthy pace but in manufacturing by the least in 28 months. Looking ahead, business expectations for the coming year were down in both sectors and, combined, slid further below the long-run average to touch a 5-month low.

Inflation trends reflected the relative strength of the two sectors. Hence, services saw a sharp increase in output prices, in part due to higher wage costs, while factory gate prices fell for the first time since September 2020. As a result, average output prices rose at the slowest rate in 25 months.

The provisional May PMI data mean that the performance gap between manufacturing and services is now the widest since January 2009. Inflation pressures are largely concentrated in services, a development being closely monitored by the ECB which will hardly welcome the latest developments. Today's update puts the Eurozone's ECDI at minus 39 and the ECDI-P at minus 55. Both readings indicate that overall economic activity is running well short of market expectations but another monetary tightening next month remains very likely.

After April's 45.8 for manufacturing and 56.2 for services, the consensus estimates for May's readings are 46.0 and 55.5 respectively. Manufacturing has been in contraction for the last ten months straight with services in expansion for the last four.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of the manufacturing and service sectors of the economy. The flash data are released around ten days ahead of the final report and are typically based upon around 75-85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The survey, produced by S&P Global uses a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.