U.S. Economy "Kicks Into High Gear"! September Composite PMI Hits Over Five-Year High; Strong Demand Intensifies Inflationary Pressure

U.S. business activity expanded in September at the fastest pace in more than five years, with both manufacturing and services strengthening in tandem and a sharp rise in new orders indicating demand remains robust. However, alongside the accelerating economy, capacity pressures and supply chain bottlenecks have clearly intensified, driving input costs sharply higher and posing new challenges for the Federal Reserve in its effort to control inflation. Preliminary data released by S&P Global on Wednesday showed that the U.S. September Composite PMI Output Index rose to 58.4 from 56.0 in August, hitting a 62-month high and the highest level since July 2021. A PMI reading above 50 indicates that private sector business activity is in expansion territory. Among the components, the U.S. September Services PMI Business Activity Index rose to 58.7 from 56.5, a 59-month high; the Manufacturing Output Index surged to 56.7 from 53.1, a 53-month high, indicating that the acceleration in economic activity was not concentrated in a single industry. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: "U.S. business activity continues to boom, with September output growth reaching the fastest level in more than five years." Comparing against historical data, S&P Global believes the latest PMI readings correspond to an annualized U.S. economic growth rate of approximately 5%, and suggest that overall third-quarter economic growth could reach about 4%. Meanwhile, the Atlanta Fed's current GDP tracking model shows the U.S. economy growing at about 5.1%. By comparison, the U.S. economy grew at an annualized rate of 1.5% in the second quarter. New Orders Hit Highest Level Since 2022 as U.S. Demand Continues to Heat Up One of the core factors driving the sharp acceleration in September business activity was a marked strengthening of domestic demand. Data showed that the U.S. New Orders Index jumped to 58.2 from 55.2 in August, the highest level since March 2022, with both services and manufacturing recording significant gains. At the same time, backlogs of orders rose to their highest level since May 2022. Backlogs are typically viewed as an important gauge of capacity utilization and future business growth, meaning that companies are now receiving orders faster than they can fulfill them. Williamson said both manufacturing and services are "clearly booming." Companies have also begun hiring more to handle the growing backlog. However, the survey showed that a growing number of firms simultaneously reported difficulty finding suitable staff. From a growth perspective, a large volume of backlogs means companies still have incentive to expand production and increase capacity in the coming months; but on the other hand, demand exceeding supply also means companies have greater pricing power, raising the risk of further inflationary pressure. Supply Chain Bottlenecks Intensify as Input Costs Hit Nearly Four-Year High Strong demand is emerging alongside supply-side constraints, making this one of the most noteworthy signals in the latest PMI report. S&P Global said that both backlogs and supply chain delays increased markedly in September, indicating insufficient operating capacity, and this capacity constraint is feeding through to prices. Williamson noted that excluding the pandemic period, the supply chain bottlenecks currently facing U.S. businesses are close to one of the most severe levels in the survey's nearly 20-year history. Supplier delivery times lengthened significantly, with the proportion of companies reporting supply chain delays reaching the highest level since July 2022. Manufacturing firms in particular noted that rising raw material prices were often linked to supply shortages. Price pressures also heated up markedly. The U.S. September Input Prices Index surged to 66.4 from 59.9 in August, the highest level since October 2022, with both manufacturing and services firms reporting higher costs, and services input price increases particularly pronounced. Meanwhile, record diesel prices could further push up goods transportation costs, meaning companies may continue to face significant cost pressures for some time. Is Overheating Demand Starting to Drive Inflation Higher? Fed Faces New Challenges Notably, the latest PMI data not only reflects persistent supply shocks but also provides evidence that strong demand itself is exacerbating inflation. Chicago Fed President Austan Goolsbee said on Monday that supply shocks have been more persistent than previously expected, and there are signs that strong demand is further intensifying price pressures. The latest PMI survey results echo this assessment. Williamson said that while rising backlogs signal further room for output and capacity expansion in the coming months, they also mean companies' pricing power is strengthening, "hence the concern over the inflation outlook." This is particularly noteworthy for the Federal Reserve, which has just restarted rate hikes. The Fed last week raised its benchmark rate by 25 basis points to 3.75%-4.00%, the first increase in more than three years, and signaled possible further monetary tightening in the coming months. The current U.S. economy presents a distinct combination: economic growth is clearly accelerating and corporate orders are strong, but at the same time supply chain bottlenecks are worsening, capacity is tightening, and price pressures are re-intensifying. S&P Global's survey shows that September business activity corresponds to an annualized growth rate of about 5%, while the input cost indicator rose to its highest level in nearly four years. For the Fed, if demand remains persistently strong and further translates into corporate pricing power, inflationary pressure may no longer come solely from energy and supply-side shocks, which would place even greater pressure on the future path of interest rate policy.