U.S. business activity rises to five-year high; inflation pressures build

U.S. business activity raced to a more than five-year high in September, fuelled by a surge in new orders, though strong demand strained supply chains and pushed prices higher.

S&P Global said on Wednesday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 58.4 this month. That was the highest level since July, 2021, and followed a reading of 56.0 in August.

A reading above 50 indicates expansion in the private sector. The rise in the PMI reflected strong gains in both the services and manufacturing sectors. The PMI was consistent with the economy growing at around a 5-per-cent annualized rate, S&P Global said. It also noted a sharp rise in work backlogs and supply chain delays, “pointing to a lack of operating capacity which fed through to higher prices.”

The Atlanta Federal Reserve’s gross domestic product tracking estimate is running at a 5.1-per-cent rate. The economy grew at a 1.5-per-cent pace in the April-June quarter.

“Business is clearly booming now in both manufacturing and services,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “However, this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded.”

The supply constraints mostly stem from the U.S.-Israeli war with Iran, now in its seventh month.

Strong demand adding to inflation

Chicago Fed President Austan Goolsbee said on Monday supply shocks were proving more persistent, adding there was evidence that strong demand was now adding to the problem. That view was supported by the findings of the S&P Global survey.

The survey’s measure of new orders received by businesses raced to 58.2, the highest reading since March, 2022, from 55.2 in August. The increase was across both services and manufacturing industries. Incomplete orders, a key indicator of capacity utilization and future business growth, increased to the highest level since May, 2022.

Though companies across manufacturing and services sectors boosted hiring to tackle the order backlog, S&P Global also noted increasing reports of problems finding suitable staff.

“While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook,” said Williamson.

The survey’s gauge of prices paid by businesses for inputs jumped to 66.4, the highest reading since October 2022, from 59.9 in August. Both services and manufacturing businesses reported higher input prices. S&P Global noted that high raw materials prices in manufacturing were also often linked to supply shortages. It said suppliers’ delivery times lengthened considerably on average, “with the incidence of supply chain delays the most widespread since July 2022.”

A measure of prices paid increased, with the sharpest gain in the services sector.

Further gains are likely as record high diesel prices will, among other things, boost the cost of transporting goods. The Federal Reserve last week raised its benchmark overnight interest rate by 25 basis points to the 3.75 per cent to 4.00 per cent range and flagged more hikes in the coming months.