The U.S. economy is facing dual pressures from Middle East conflicts, with cooling demand and rising costs simultaneously intensifying, further elevating the risk of stagflation. Data released on Thursday showed the preliminary U.S. Composite PMI for May came in at 51.7, unchanged from April, indicating overall business activity maintained a modest expansion. However, the structural divergence beneath the aggregate figure and price signals are more concerning. The data revealed that the Manufacturing PMI unexpectedly rose to 55.3, reaching a 48-month high, while the Services PMI stood at only 50.9, teetering on the edge of stagnation. Concurrently, input cost inflation hit its highest level since the end of 2022, and selling price inflation climbed to a near four-year high, indicating businesses are accelerating the pass-through of costs to end customers. The impact of Middle East conflicts on the economy is becoming increasingly evident in the PMI data. A warning was issued that the May PMI suggests annualized GDP growth in the second quarter may struggle to exceed 1%, and "this sluggish pace of growth may not be sustainable." New order growth over the past three months has slowed to its weakest in two years, and the support from precautionary inventory building will eventually fade. The simultaneous emergence of rising inflation and cooling economic activity further narrows the room for policy response. The divergence between manufacturing and services intensified in May. The Manufacturing PMI rose from 54.5 in April to 55.3. The manufacturing output index climbed to 56.2, a 49-month high, with output growth at its fastest since April 2022 and employment growth at its fastest since June 2023. Business expectations for output over the next 12 months rose to the most optimistic level. However, this strong performance was partly driven by customers' precautionary stockpiling rather than a substantial improvement in end demand. New export orders continued to decline, with manufacturing order growth entirely reliant on domestic demand. The picture for the services sector is starkly different. The services business activity index fell to 50.9, a two-month low. New business in the services sector increased only marginally, slightly better than the slight contraction seen in April. Service exports declined at the fastest pace in six years. The simultaneous contraction in consumer and export demand is dragging down the services sector, which is on track for its weakest quarterly performance since the end of 2023. The decline in services employment was the second fastest since May 2020, only surpassed by April 2024. Several forward-looking indicators point to further demand deterioration. Over the past three months, the rate of growth for composite new orders has slowed to its weakest in two years, and the boost to recent manufacturing figures from precautionary inventory building is a one-off effect. It was explicitly stated that this demand support "will not last forever." Sentiment also shows a clear divergence. Confidence among services firms regarding output expectations for the coming year fell to its lowest level and its second-lowest level, highlighting multiple concerns among businesses about demand prospects, soaring prices, rising interest rates, and political uncertainty. Manufacturing firms were relatively more optimistic, with expectations rising to their highest level, primarily benefiting from recent order improvements and ongoing expectations for tariff-related manufacturing reshoring. Overall, the current PMI data presents a combination of "slowing growth and resurgent inflation." It was summarized that "survey price indicators suggest inflation looks set to move higher as the economy cools." This outlook presents a policy dilemma for the Federal Reserve: inflationary pressures limit the scope for interest rate cuts, while fading economic momentum makes it difficult to sustain the ongoing pressure of maintaining high rates.