© Reuters. FILE PHOTO: Stacked containers are shown as ships unload their cargo at the Port of Los Angeles in Los Angeles, California, U.S. November 22, 2021. REUTERS/Mike Blake

WASHINGTON (Reuters) – U.S. business activity slowed moderately in May as higher prices cooled demand for services while renewed supply constraints because of COVID-19 lockdowns in China and the ongoing conflict in Ukraine hampered production at factories.

S&P Global (NYSE:SPGI) said on Tuesday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to a reading of 53.8 this month from 56.0 in April. That growth pace, which was the slowest in four months, was attributed to “elevated inflationary pressures, a further deterioration in supplier delivery times and weaker demand growth.”

A reading above 50 indicates expansion in the private sector. The index remains consistent with strong economic growth halfway through the second quarter. The economy contracted in the first quarter under the weight of a record trade deficit, although domestic demand remained solid as households increased spending and businesses ramped up investment in equipment.

Annual consumer prices have increased at their fastest pace in 40 years, prompting the Federal Reserve to start raising interest rates in March and increasingly adopt an aggressive monetary policy posture. The rate hikes and tightening financial conditions have raised fears of a recession next year.

The flash composite orders index slipped to 54.4 this month from 56.6 in April.

“Companies report that demand is coming under pressure from concerns over the cost of living, higher interest rates and a broader economic slowdown,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The survey’s flash manufacturing PMI decreased to a reading of 57.5 this month from 59.2 in April. That was in line with economists’ expectations. Manufacturing accounts for 12% of the economy.

A measure of output at factories eased to 55.2 in May from 57.6 in April amid “further reports of raw material shortages and delays in supplier delivery times,” which also boosted unfinished work backlogs. China’s zero COVID-19 policy led to the shutdown of the commercial hub of Shanghai, a major supplier of raw materials to factories in the United States.

Its measure of prices paid for inputs by manufacturers accelerated to 84.9 this month from 81.9 in April. But factories continued to hire more workers this month.

The survey’s flash services sector PMI dropped to a reading of 53.5 this month from 55.6 in April. Economists polled by Reuters had forecast a reading of 55.2 this month for the services sector, which makes up more than two-thirds of U.S. economic activity.

© Reuters. Herve Volochinoff, 24, works on the structure of a window at Fligitter, a window-maker company located in Ottmarsheim, France, May 19, 2022. REUTERS/Caroline Pailliez

By Caroline Pailliez

OTTMARSHEIM, France (Reuters) – When its employees started leaving in droves for better-paying jobs across the border in Switzerland, family-run French window maker Fligitter knew it needed to do something to retain staff.

With surging raw material costs leaving little room to hike wages, Fligitter’s management seized on changes made in 2017 by President Emmanuel Macron to France’s strict labour laws that enable companies to offer tax-free bonuses in exchange for cutting both overtime pay and length of service salary rises.

Last September the firm reached agreement with its staff representatives to change its pay structure and introduce a tax-free monthly bonus instead of overtime pay and cap its length of service pay rises to just five years, from an industry norm of 15 years.

As record inflation erodes their purchasing power, workers like Herve Volochinoff say the pay deal has made a real difference.

The new pay structure has pushed up his take-home pay to 1,600 euros ($1,712.64) a month, from 1,450 euros a month previously, he said.

“I’m coming out short on overtime pay, but I wouldn’t have turned down an increase in wages,” Volochinoff, 24, told Reuters as he put screws into a PVC window frame at the company’s factory at Ottmarsheim in Alsace, eastern France.

“Without this increase, I would have had a hard time making ends meet,” he said, adding he planned to use the extra cash to buy furniture for a flat he has just moved into.

The agreement translated into 6-8% pay increases while lifting the firm’s wage bill for its 80 staff by only 4%, according to Fligitter’s human resources department.

Fligitter’s deal is one example of how French firms are finding wiggle room in France’s complex labour laws to meet employees’ demands for higher pay while limiting the hit to profit margins squeezed by high raw material costs.

Fligitter says it was losing six or seven workers a month and struggling to find replacements, but could not afford big wage hikes.

Its new pay deal is possible because Macron gave companies more flexibility to set working conditions. Unions and many workers, however, still despise the former investment banker for what they see as sacrificing their cherished labour rights for the benefit of companies.

“We could not have increased salaries without changing the whole compensation structure. It was impossible, otherwise the factory would have to close in the medium term,” said Raphael Fligitter, who runs the 54-year old company and is the son of its founder. 1a4f2c8e-b99d-4642-8fc9-1fd1ca7157d81

Graphic: Inflation in EU countries – https://graphics.reuters.com/FRANCE-INFLATION/mopanzqeqva/chart_eikon.jpg

WAGE PRESSURE

While costly government caps on gas and power prices have kept French inflation lower than most other European countries, it nonetheless hit a record 5.4% last month and is spurring employee demands for higher wages.

Sector-level pay negotiations have led to an average 3% wage increase for French workers this year, compared with 1% in recent years, according to the French central bank. But as inflation keeps rising, unions are pushing for new rounds of wage negotiations.

Many companies are looking for one-off solutions like tax-free bonuses to lift pay without getting locked into higher wages that could be costly to maintain long term.

Macron’s 2017 reform made it possible for companies to lower pay below what is stipulated in employees’ contracts during tough times in order to save jobs.

Though such agreements remain rare, nearly 200 firms used the flexibility Macron introduced into the labour laws to cope with the downturn during the pandemic, according to the Labour Ministry.

“Employers take advantage of the bad employment situation to say that there is no alternative. It’s shameful,” said Boris Plazzi, a top official at the hardline CGT union.

GIVE-AND-TAKE

Fligitter’s deal also cuts pension and welfare contributions, making them less costly for the firm. That means employees also make lower pension contributions.

Volochinoff said he had not understood all the changes at first, including the impact on his pension. The loss of extra pay for length of service would only make a difference over the very long term, he said.

Fligitter’s handful of executives had to make the biggest sacrifices under the deal, notably by agreeing to smaller potential severance packages and losing three days of paid annual leave. They are not entitled to the new monthly bonuses but in exchange their wages were increased.

Jeremy Mosak, who heads the firm’s design department and has been with the company for 16 years, said that at first he had been taken aback by the deal before warming to it.

“I don’t think I’ve come out badly from this,” he said.

($1 = 0.9342 euros)

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© Reuters. FILE PHOTO: Rescuers search for bodies under the rubble of a building destroyed by Russian shelling, amid Russia’s invasion of Ukraine, in Borodyanka, Kyiv region, Ukraine April 11, 2022. REUTERS/Zohra Bensemra

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BERLIN (Reuters) – German Finance Minister Christian Lindner said on Tuesday it was impossible to say how much it would cost to rebuild Ukraine as long as fighting with Russia continues, amid European Union discussions on how to fund further aid for Kyiv.

“The Ukrainian side doesn’t talk a lot about reconstruction. The priority is stopping the war, the priority is securing the functionality of the Ukrainian state,” Lindner said in Brussels after the May meeting of European finance ministers.

“No one can put a number on how great the need is to rebuild the country,” he added.

Providing reconstruction aid to Kyiv was not just the responsibility of Europe, but also international bodies such as the International Monetary Fund, the World Bank and the private banking sector, added Lindner.

He also alluded to the possibility of seizing Russian state assets to help fund reconstruction – a Ukrainian request which the minister said last week was being considered by the Group of Seven (G7) nations.

Last week, the European Commission proposed setting up a “RebuildUkraine” facility of grants and loans of unspecified size, modelled on the EU’s existing recovery fund for which the bloc jointly borrowed on the market.

It remains unclear how this new fund would be financed, but Lindner reiterated on Tuesday that Germany rules out the issuance of any further joint EU debt and called for a consolidation of EU finances in 2023.