US service sector activity grows at fastest pace in over five years! September PMI rises to 58.8, as strong demand reignites inflation pressures

According to The Zhihui Finance APP, data released by S&P Global on Monday showed a significant acceleration in the US services sector activity in September. The Services PMI Business Activity Index rose from 56.5 in August to 58.8, marking the fourth consecutive month of increases and the sixth straight month in expansion territory, reaching the fastest expansion rate since July 2021. Meanwhile, the growth rate of new orders reached the highest level in four and a half years, employment growth was the fastest since June 2022, but input cost inflation also rebounded sharply to its highest since November 2022, indicating that while the US economic growth momentum has strengthened, inflationary pressures remain significant.  

Services PMI Rises to 58.8, New Order Growth Hits Four-and-a-Half-Year High

Data shows that US services business activity accelerated notably in September. The S&P Global US Services PMI Business Activity Index rose to 58.8, higher than August’s 56.5, with the latest expansion being the largest in more than five years. Notably, for the first time in 10 months, all five major sectors covered by the survey achieved output growth, with the transportation and warehousing sector resuming expansion and the information and communication sector showing the most prominent growth.    

Strong demand continued to be the primary driver of accelerated services activity. In September, new orders in the services sector continued to rise sharply, with the growth rate accelerating further to the highest in four and a half years, as companies particularly highlighted robust domestic demand in the US. Although the growth rate of new export orders was significantly lower than overall new business, it marked the second consecutive month of increase and matched the 20-month high set in August.     

As orders grew rapidly, service sector companies further expanded hiring. Employment numbers increased for a third consecutive month in September, with job growth reaching the fastest pace since June 2022. Even as businesses actively increased headcount, the strength of new orders still outpaced their capacity to handle them, resulting in a 19th consecutive monthly increase in backlogged work, with the rate of growth being one of the fastest in nearly four and a half years.     

Businesses also became more optimistic about their future outlook. The survey showed that confidence among service sector firms in output growth for the next 12 months rose to a one-year high. Companies attributed their optimism to new product launches, new customer gains, referrals from existing clients, and expectations of future order increases, while some also looked forward to a possible easing of inflationary pressures.    

Input Cost Inflation at Fastest Pace in Nearly Four Years, Price Pressures Heat Up Again

However, alongside the acceleration in economic activity, price pressures in the US services sector have noticeably intensified.

Data shows that after service sector input cost inflation fell to a 16-month low in August, it rebounded sharply in September to the fastest pace since November 2022. Companies widely cited rising gasoline and transportation costs, with some also noting an increase in labor expenses. Meanwhile, the increase in output prices for services firms also accelerated, reaching the second-highest level in over a year, only behind July this year.    

S&P Global Market Intelligence Chief Business Economist Chris Williamson stated that, looking at both goods and services, US business input costs are now rising at the fastest rate in nearly four years. Although some of this is due to rising fuel prices, what is more noteworthy is that the pace of selling price increases has picked up again, indicating that inflation remains stubbornly above the Federal Reserve's 2% target.  

This also means the renewed acceleration in US economic growth could present a more complex policy environment for the Federal Reserve. On one hand, economic activity and employment remain strong; on the other, the simultaneous upturn in cost and sales price pressures makes further easing of inflation challenging.

Composite PMI Rises to 58.4; S&P Global Expects US Q3 Economic Growth Around 4%

Not only is the services sector performing strongly, but overall US business activity also accelerated further in September.

The S&P Global US Composite PMI Output Index climbed from 56.0 in August to 58.4 in September, the highest level in more than five years. Both manufacturing and services saw faster growth, with new orders rising rapidly and driving the fastest pace of hiring since June 2022. Meanwhile, the pace of input cost increases for both goods and services rose to the highest since October 2022, and the increase in business output prices also accelerated.  

Williamson noted that the expansion in US business activity in September reached its highest level in more than five years, with improving demand and growing business confidence pushing hiring to the fastest rate in over four years. Alongside robust manufacturing PMI numbers, the strong expansion in services suggests that US GDP growth in the third quarter could reach an annualized rate of around 4%, and the growth momentum seen just in September alone could correspond to around 5%, indicating the economy continues to accelerate as it enters the fourth quarter.    

Sector-wise, technology firms reported the strongest growth, but improvements in activity are no longer confined to a few areas. Consumer-related businesses, industrials, and healthcare sectors all saw accelerations in growth, while financial services continued steady expansion.  

In summary, September PMI data indicates that the US economy showed clear signs of acceleration at the end of the third quarter, with strong and synchronized improvements in services demand, orders, employment, and business confidence. However, faster economic growth has brought rising input and output prices, intensifying concerns about sticky inflation. For the Federal Reserve, future policy deliberations may need to balance robust growth against persistent, above-target inflationary pressures.