• U.S. business activity accelerated sharply in September, with manufacturing PMI at 57.0, services at 58.7, and composite at 58.4, all well above expectations.
  • Input costs jumped to their highest level since 2022, driven by energy and transport costs, adding to inflation concerns even as selling-price increases remained relatively contained.

Flash PMI Points to Broadest Expansion in Over Five Years

The U.S. private sector roared back to life in September, according to the latest flash PMI data from S&P Global. The composite index, a weighted average of manufacturing and services activity, surged to 58.4, its highest reading in more than five years. The manufacturing PMI climbed to 57.0, while the services PMI reached 58.7, both comfortably above the 50 mark that separates expansion from contraction and exceeding analyst forecasts.

The robust readings suggest the U.S. economy is firing on all cylinders, with demand strong across both goods-producing and service-providing sectors. Hiring also picked up, pointing to resilient business confidence despite lingering global uncertainties. “The acceleration is broad-based, not just a services-led phenomenon,” noted one economist familiar with the data. “This is the strongest growth signal we’ve seen since the pandemic recovery.”

Cost Pressures Build

However, the surge in activity came alongside a sharp rise in input costs. The survey’s measure of input prices jumped to its highest level since 2022, driven primarily by higher energy and transportation costs. Diesel prices, for instance, have climbed about 15% in September, with gasoline up roughly 10%, according to market data. Those increases ripple through supply chains, raising costs for freight, manufacturing, and services firms alike.

Despite the cost surge, selling-price increases remained relatively contained, suggesting many companies are absorbing higher expenses into their margins rather than fully passing them on to customers. That dynamic may be temporary. “Firms can only compress margins for so long,” said a strategist at a major asset manager. “If input costs stay elevated, we’ll likely see more pass-through to consumer prices in coming months.”

Implications for the Fed and Markets

The combination of strong growth and rising cost pressures complicates the outlook for monetary policy. A resilient economy reduces the urgency for aggressive rate cuts, while the uptick in input costs raises the risk of renewed inflation. Fed officials have repeatedly emphasized that they need to see sustained progress on inflation before easing policy further. September’s PMI data may reinforce a “higher-for-longer” stance.

Markets reacted to the data with a mixed tone. Treasury yields edged higher, and the dollar strengthened against major currencies, reflecting expectations of tighter policy for longer. Equities were more muted, with cyclical sectors outperforming while rate-sensitive growth stocks lagged.

A Double-Edged Sword for Businesses

The strong demand environment is a boon for many companies, particularly in manufacturing and transport-intensive industries. Yet the margin squeeze from rising input costs is a growing concern, especially for smaller firms with less pricing power. “We’re seeing a tale of two economies,” said one industry executive. “Those with scale can manage, but smaller players are feeling the pinch.”

The data also lands in a politically charged environment, with energy costs already a sensitive topic for households and businesses. While the strong labor market remains a buffer for consumers, higher fuel and logistics costs could erode purchasing power if they persist.

Looking ahead, the key question is whether the cost pressures prove transitory or intensify. Much will depend on energy prices and supply-chain conditions. For now, the U.S. economy is displaying remarkable vigor—but with that vigor comes the risk of an inflation comeback that could test the Fed’s resolve and unsettle markets.

Correction: An earlier version of this article misstated the historical context for the services PMI. The services PMI reached 58.7, not 57.0.