The US economy is “speeding up”! The composite PMI hit a new high of more than five years in September, and strong demand intensified inflationary pressure

The Zhitong Finance App learned that business activity in the US expanded at the fastest rate in more than five years in September. The manufacturing and service industries strengthened simultaneously, and the sharp increase in new orders showed that demand was still strong. However, while the economy is accelerating, pressure on corporate production capacity and supply chain bottlenecks have clearly increased, and investment costs have risen rapidly, adding new challenges to the Federal Reserve's control of inflation.

According to preliminary data released by S&P Global on Wednesday, the US composite PMI output index for September rose to 58.4 from 56.0 in August, a 62-month high, and the highest level since July 2021. A PMI above 50 means that private sector economic activity is expanding. Among them, the US service sector PMI business activity index rose from 56.5 to 58.7, a 59-month high in September; the manufacturing output index rose sharply from 53.1 to 56.7, a 53-month high, indicating that this round of acceleration in economic activity was not concentrated in a single industry.

Chris Williamson, chief business economist at S&P Global Markets Finance Intelligence, said, “US corporate activity continues to flourish, and output growth in September reached the fastest level in more than five years.”

Comparing historical data, S&P Global believes that the US economy's annualized growth rate corresponding to the latest PMI data is about 5%, and suggests that the overall economic growth rate in the third quarter may reach about 4%. Meanwhile, the Atlanta Federal Reserve's current GDP tracking model shows that the US economy is growing at a rate of about 5.1%. By contrast, the US economy grew at an annualized rate of 1.5% in the second quarter.

New orders hit the highest level since 2022, US demand continues to heat up

One of the core factors driving the sharp acceleration of business activity in September was the marked strengthening of domestic demand in the US. According to the data, the US corporate new orders index jumped from 55.2 in August to 58.2, the highest level since March 2022, and both the service sector and manufacturing industry recorded significant growth.

Meanwhile, the company's unfulfilled orders rose to the highest level since May 2022. Unfinished orders are generally regarded as an important indicator for measuring a company's capacity utilization and future business growth, which means that the speed at which companies currently receive orders has begun to exceed their ability to complete orders.

Williamson said the manufacturing and service industries are “clearly booming” at present. Businesses are also starting to increase recruitment to handle the ongoing backlog of orders. However, the survey shows that more and more companies are also reporting that it is difficult to find the right employees.

From a growth perspective, a large number of unfulfilled orders means that companies will still have the motivation to expand production and increase production capacity in the coming months; but on the other hand, short supply also means that companies have stronger pricing capacity, thereby increasing the risk of further increases in inflation.

Supply chain bottlenecks exacerbate the biggest pressure on enterprise investment costs in nearly four years

Strong demand is occurring at the same time as supply-side constraints, which is one of the most noteworthy signs in the latest PMI report. S&P Global said that the backlog of corporate orders and supply chain delays increased markedly in September, indicating that the company's operating capacity is insufficient, and this capacity constraint is being further transmitted to prices.

Williamson pointed out that if the pandemic period is excluded, the supply chain bottlenecks currently faced by US companies are close to one of the worst levels in the nearly 20-year history of the survey.

Supplier delivery times have been significantly extended, and the proportion of companies reporting supply chain delays reached the highest level since July 2022. In particular, manufacturing companies mentioned that rising raw material prices are often linked to supply shortages.

Price pressure has also increased markedly. The US corporate investment price index rose sharply to 66.4 in September from 59.9 in August, the highest level since October 2022. Both manufacturing and service companies reported rising costs. Among them, the increase in investment prices in the service sector was particularly significant. At the same time, record diesel prices may further drive up commodity transportation costs, which means that companies may still face greater cost pressure for some time to come.

Is overheating demand starting to drive up inflation? The Federal Reserve faces new challenges

Notably, the latest PMI data not only reflects the persistence of supply shocks, but also provides signs that strong demand itself is increasing inflation.

Chicago Federal Reserve Chairman Goulsby said this Monday that the supply shock is more lasting than previously anticipated, and there are signs that strong demand is further increasing price pressure. The latest PMI survey results echo this judgment.

Williamson said that although the continued increase in unfinished orders indicates that there is still room for further expansion in output and production capacity in the next few months, it also means that the pricing capacity of companies is increasing, “so there are concerns about the prospects for inflation.”

This is particularly noteworthy for the US Federal Reserve, which has just restarted raising interest rates. The Federal Reserve raised the benchmark interest rate by 25 basis points to 3.75%-4.00% last week, the first rate hike in more than three years, and a signal that monetary policy may continue to be tightened in the coming months.

Currently, the US economy shows a clear combination, that is, economic growth is clearly accelerating, corporate orders are strong, but at the same time, supply chain bottlenecks are worsening, production capacity is tightening, and price pressure is heating up again.

According to the S&P Global survey, economic activity in September corresponded to an annualized growth rate of about 5%, while investment cost indicators rose to the highest level in nearly four years. For the Federal Reserve, if demand continues to be strong and further transformed into corporate pricing capacity, inflationary pressure may no longer only come from energy and supply-side shocks, which will also put more pressure on the future interest rate policy path.