US business activity expanded in September at the fastest clip in over five years, with both the manufacturing and service sectors showing synchronized strength and a substantial jump in new orders pointing to persistent demand. However, this acceleration is accompanied by visibly intensifying capacity strains and supply-chain bottlenecks, which are driving input costs sharply higher and posing fresh hurdles for the Federal Reserve's efforts to tame inflation.
Flash data from S&P Global released on Wednesday showed the US Composite PMI Output Index climbing to 58.4 in September from 56.0 in August, marking a 62-month high and the strongest reading since July 2021. A PMI reading above 50 signals expansion in private-sector economic activity. Within the details, the US Services PMI Business Activity Index rose to 58.7 from 56.5, reaching a 59-month peak, while the Manufacturing Output Index jumped to 56.7 from 53.1, hitting a 53-month high — evidence that the current acceleration is not confined to a single sector.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that "US business activity continues to boom, with output growth accelerating to the fastest for over five years in September." Based on historical comparisons, S&P Global estimates the latest PMI readings correspond to an annualized US economic growth rate of approximately 5%, suggesting that overall growth in the third quarter could come in at around 4%. For reference, the Atlanta Fed's current GDP tracking model points to a US growth pace of roughly 5.1%, while the economy expanded at an annualized rate of just 1.5% in the second quarter.
New Orders Hit Highest Since 2022 as Demand Heats Up
One of the core factors propelling the sharp acceleration in September business activity is a clear strengthening of domestic demand. The data show the new orders index leaping to 58.2 in September from 55.2 in August, its highest level since March 2022, with both the service and manufacturing sectors recording notable gains. Meanwhile, backlogs of work climbed to their highest level since May 2022. Backlogs are widely viewed as a key gauge of capacity utilization and a leading indicator of future business growth, and the current level suggests that the pace at which orders are arriving has begun to outstrip the rate at which companies can complete them.
Williamson observed that both manufacturing and services are "clearly booming," and firms are stepping up hiring to handle the mounting pile of unfinished work. However, the survey indicates that a growing number of companies are encountering difficulty in finding suitable workers. From a growth perspective, substantial backlogs imply that businesses will retain the incentive to expand production and capacity over the coming months. On the other hand, supply falling short of demand also hands companies greater pricing power, thereby heightening the risk of a further rise in inflation.
Supply Bottlenecks Intensify as Input Costs Hit Near Four-Year High
Strong demand arriving at the same time as supply-side constraints represents one of the most noteworthy signals in the latest PMI report. S&P Global said backlogs of work and supply-chain delays both increased markedly in September, indicating that business operating capacity is stretched, and these capacity limits are now feeding through to prices. Williamson pointed out that, excluding the pandemic period, the supply-chain bottlenecks currently confronting US firms are approaching the most severe levels seen in the survey's nearly 20-year history.
Supplier delivery times lengthened considerably, with the proportion of companies reporting supply-chain delays reaching the highest level since July 2022. Manufacturers in particular cited raw material price increases often tied to supply shortages. Price pressures have consequently ramped up noticeably. The US Composite Input Prices Index surged to 66.4 in September from 59.9 in August, the highest reading since October 2022, with both manufacturing and services firms reporting higher costs — and the services sector seeing especially pronounced input price gains. In addition, record diesel prices could further push up the cost of transporting goods, implying that companies may continue to face significant cost pressure for some time.
Is Overheated Demand Starting to Push Up Inflation? The Fed Confronts New Obstacles
Notably, the latest PMI data not only reflect the persistence of supply shocks but also provide indications that robust demand itself is beginning to aggravate price pressures. Chicago Fed President Austan Goolsbee said on Monday that supply shocks have proven more persistent than previously anticipated, and there are already signs that strong demand is further amplifying price pressures. The latest PMI survey echoes that assessment.
Williamson said that while the steady build-up in backlogs points to further room for output and capacity expansion in the months ahead, it simultaneously means businesses are gaining stronger pricing power, "thus making the inflation outlook worrying." That is a key concern for a Federal Reserve that has only just resumed raising interest rates. Last week, the Fed increased its benchmark rate by 25 basis points to a range of 3.75%-4.00%, marking the first hike in over three years, and signaled that further monetary policy tightening could be forthcoming in the coming months.
The US economy is currently presenting a distinctive combination: growth accelerating noticeably and business orders holding strong, yet supply-chain bottlenecks worsening, capacity tightening, and price pressures reheating. S&P Global's survey indicates that September economic activity corresponds to an annualized growth rate of roughly 5%, while the input cost gauge has climbed to a near-four-year high. For the Fed, if demand continues to run hot and translates into greater corporate pricing power, inflation pressures may no longer stem solely from energy and supply-side shocks, placing even greater strain on the future path of interest rate policy.
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