US business activity hits five-year high but strong demand fuels inflation fears

In September, US business activity surged to its most robust level in five years, driven by a surge in new orders, according to S&P Global. The Composite PMI Output Index, which gauges the manufacturing and services sectors, rose to 58.4 in September, marking the highest level since July 2021. This followed an August reading of 56.0, indicating expansion in both sectors.

The PMI's expansion aligns with an economy growing at about a 5% annualized rate. However, the robust demand for goods has strained supply chains, leading to higher prices. S&P Global's data shows a notable rise in work backlogs and supply chain delays, suggesting a shortage of operating capacity. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the economy is booming in both manufacturing and services.

Nevertheless, this growth is accompanied by severe supply chain bottlenecks, particularly due to the ongoing US-Israeli war with Iran, now in its seventh month. Strong demand is also contributing to inflation, with the S&P Global survey's measure of new orders reaching a five-year high in September. The survey also found that incomplete orders, a key indicator of capacity utilization, reached the highest level since May 2022.

While companies are hiring to meet the order backlog, they are also experiencing growing pricing power, which could fuel inflation concerns. Input prices for businesses in both sectors have increased, with raw materials prices in manufacturing rising notably. Supply chain delays have become the most widespread issue in supply chains since July 2022, adding to the cost of transporting goods.

The Federal Reserve recently increased its benchmark interest rate by 25 basis points, signaling potential further hikes in the coming months.