China’s Caixin/S&P PMI for May 2025 reported a services score of 51.1, slightly above the expected 51.0 and last month’s 50.7. This indicates a rise in overall demand and business confidence. However, foreign demand shrank for the first time this year. New export business saw a small decline, the first since December. The job market showed a slight improvement, breaking a two-month downturn and reaching a six-month high. Input costs rose at the fastest rate in seven months, mainly due to increasing purchase prices and labor expenses. Despite this, prices charged to customers dropped for the fourth month in a row. The composite index fell to 49.6, driven by a lower manufacturing PMI of 48.3, down from the previous 50.4. This composite figure is the lowest since December 2022, compared to the earlier score of 51.1. The latest data presents a mixed picture of economic activity. Some service-related indicators show growth, while broader measures are starting to decline. The services PMI of 51.1 indicates mild growth—not remarkable, but still a positive trend after the previous month’s reading of 50.7. This increase suggests more business activity and a slightly better outlook among service firms. However, the decline in new export orders raises concerns. This slip in external demand—especially after steady growth this year—could signal challenges in global demand, hinting that the external sector may not be as strong as domestic activity right now. Notably, this marks the first decline in new foreign business since December, suggesting a shift in trends rather than just a single drop. The labor market seems to be stabilizing. A small increase in employment, after two months of job losses, indicates that employers are slowly regaining confidence and may be preparing for anticipated demand, even if current figures don’t warrant major hiring. We’re also seeing the highest employment growth in six months, albeit slight, suggesting hiring managers expect demand to hold up in the near future. Cost pressures are building. Input costs surged at their fastest rate in seven months due to higher raw material and wage costs. This situation is uncomfortable, especially since prices charged to customers continue to fall for the fourth consecutive month. The gap between rising input costs and declining output prices could eventually force businesses to respond. When we combine the numbers in the composite PMI, we see a sharp decline to 49.6. This is below the neutral mark of 50, indicating a slowdown in overall activity. It’s the lowest score since December 2022. While this doesn’t mean services are contracting, the significant drop in the manufacturing PMI to 48.3 from 50.4 is noteworthy. This decline shows a retreat in factory activity, which raises caution, especially as it reflects weaknesses in new orders and production. In the upcoming weeks, it will be important to monitor the disparity between the resilient service sector and the declining manufacturing sector. We are entering a phase of tightening margins, mixed volume signals, and waning external demand. Additionally, consumer resistance to price increases is apparent as businesses struggle to pass on higher costs. This can negatively impact business models more than the surface-level figures suggest. In the short term, it might be prudent to look at the performance differences between service-related sectors and those reliant on international manufacturing orders. Changes in how companies handle wage pressures and pricing strategies could lead to greater fluctuations in producer margins and potentially earnings. Keeping an eye on firms facing rising costs while struggling to adjust prices is essential. Lastly, employment data deserves attention. While it’s encouraging to see job growth, if it doesn’t lead to stronger output, it could cause inefficiencies. Employers may soon face challenges regarding productivity. If input cost pressures stay high, we might see adjustments in capital allocation, favoring automation or moving away from labor-intensive areas. This shift could impact expectations in the near future.

here to set up a live account on VT Markets now