U.S. services activity grows at fastest pace in more than five years! September PMI rises to 58.8, inflation pressures heat up again amid strong demand.

S&P Global data released on Monday showed that U.S. services activity accelerated sharply in September, with the Services PMI Business Activity Index rising to 58.8 from 56.5 in August, marking a fourth consecutive monthly increase and a sixth straight month in expansion territory, the fastest pace of expansion since July 2021. At the same time, new order growth rose to the highest level in four and a half years, and employment growth was the fastest since June 2022, but input cost inflation also rebounded markedly to its highest level since November 2022, suggesting that while U.S. economic growth momentum is strengthening, inflationary pressures remain a concern. Services PMI rises to 58.8, new order growth hits four-and-a-half-year high The data showed that U.S. services business activity accelerated significantly in September. The S&P Global U.S. Services PMI Business Activity Index rose to 58.8, above August's 56.5, with the latest expansion the largest in more than five years. Notably, output rose across all five sectors covered by the survey for the first time in 10 months, with transport and storage returning to expansion, while growth in the information and communication sector was the most prominent. Strong demand was the main driver of the acceleration in services activity. New orders in services continued to increase sharply in September, with growth accelerating further to the highest level in four and a half years, with firms particularly citing strong domestic demand. Although new export order growth was significantly lower than overall new business, it rose for a second consecutive month, with the pace matching the 20-month high set in August. With orders rising rapidly, services firms expanded hiring further. Employment rose for a third consecutive month in September, with jobs growth the fastest since June 2022. Even as firms actively expanded headcount, the strength of new orders continued to exceed firms' capacity to process them, with backlogs of work rising for a 19th consecutive month and at one of the fastest rates in nearly four and a half years. Firms also became more optimistic about future business prospects. The survey showed that services firms' confidence in output growth over the next 12 months rose to a one-year high. Firms attributed their optimism to new product launches, new client wins, referrals from existing customers and expected future new order growth, while some also anticipated an easing of inflationary pressures. Input cost inflation among fastest in nearly four years as price pressures heat up again However, alongside the acceleration in economic activity, price pressures in the U.S. services sector strengthened markedly. The data showed that services input cost inflation rebounded sharply in September after falling to a 16-month low in August, rising to its fastest level since November 2022. Firms widely cited higher gasoline prices and transport costs, with some also reporting higher labor costs. At the same time, services firms' output price inflation accelerated further, reaching its second-highest level in more than a year, surpassed only by July this year. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that across both goods and services, U.S. firms' input costs are currently rising at the fastest pace in nearly four years. Although part of this reflects higher fuel prices, more noteworthy is that firms' selling price inflation has also reaccelerated, showing that inflation remains stubbornly above the Federal Reserve's 2% target. This also means that the reacceleration of U.S. economic growth could leave the Federal Reserve facing a more complicated policy environment. On the one hand, economic activity and employment remain strong; on the other, cost and selling price pressures are rising in tandem, making further disinflation challenging. Composite PMI rises to 58.4; S&P Global expects about 4% U.S. growth in Q3 Not only was services performance strong, but overall U.S. business activity also accelerated further in September. The S&P Global U.S. Composite PMI Output Index rose to 58.4 in September from 56.0 in August, the highest level in more than five years. Both manufacturing and services posted faster growth, with new orders rising rapidly and driving firms to expand hiring at the fastest pace since June 2022. At the same time, input cost growth across goods and services combined rose to its fastest since October 2022, and firms' output price inflation also accelerated. Williamson said that U.S. business activity growth rose to its highest level in more than five years in September, with improving demand and stronger business optimism driving hiring growth at the fastest pace in more than four years. Combined with solid manufacturing PMI data, the strong services expansion means U.S. economic growth in the third quarter could reach about 4% on an annualized basis, while the growth momentum in September alone could correspond to a pace of about 5%, suggesting the economy was accelerating further as it entered the fourth quarter. By sector, technology firms reported the strongest growth, but the improvement in business activity was no longer confined to a few areas. Growth accelerated in consumer-related firms, industrials and healthcare, while financial services also maintained solid expansion. Overall, the September PMI data showed that the U.S. economy showed clear signs of acceleration at the end of the third quarter, with services demand, orders, employment and business confidence all strengthening in tandem. However, the rise in costs and selling prices accompanying faster economic growth has further intensified market concerns about sticky inflation. For the Federal Reserve, future policy judgments may need to balance strong economic growth against inflation pressures that remain persistently above target.