US Business Activity Accelerates Sharply in September
TREE NEWS reports: US business activity accelerated well beyond expectations in September, with the S&P Global composite purchasing managers’ index rising to 58.4 from 55.3 expected, the highest reading since July 2021. The services PMI climbed to 58.7, beating forecasts of 55.8 and marking the strongest expansion since 2021, while the manufacturing PMI jumped to 57, its best level since 2022 and far above the 53.7 consensus.
New orders expanded at the fastest pace since April 2022, manufacturing hiring reached its highest since February 2021, and services employment hit a June 2022 high. The survey data imply annualized economic growth of roughly 5% and point to about 4% growth for the third quarter as a whole.
Demand Drivers and Supply Constraints
The expansion is being powered by resilient consumer spending, a continuing boom in artificial intelligence-related business investment, and additional support from defense spending. Strong demand is offsetting the drag from energy cost increases and supply chain disruptions linked to the Iran conflict.
However, the supply side is tightening. Supplier delivery times lengthened by the most since mid-2022, raw material costs remain elevated, and input price inflation hit its fastest pace since 2022. Firms attributed cost pressures mainly to higher fuel and transport costs, with wage pressures also rising. Chris Williamson, chief business economist at S&P Global Market Intelligence, warned that firms are finding it increasingly difficult to recruit suitable staff, and that excluding the pandemic period, supply chain bottlenecks are among the worst in nearly two decades of survey history.
Market Implications
The data sent a complex signal to markets: robust demand supports the growth outlook, but accelerating input costs and persistent supply strains could pressure corporate earnings and inflation. The 10-year Treasury yield broke back above 5%, and the probability of another Fed rate hike in October rose to 63.1%.
- Stocks: Cyclical sectors and industrials may benefit from strong demand, but rising yields and cost pressures could weigh on rate-sensitive growth and tech names. Margin compression from higher input costs is a key risk.
- Bonds: The yield surge reflects expectations of tighter monetary policy and higher inflation, pushing bond prices lower. The 5% level on the 10-year is a psychologically significant threshold that could trigger further selling.
- Crypto: Higher real yields and a stronger dollar typically act as headwinds for risk assets, including cryptocurrencies. Bitcoin and other digital assets may face pressure as liquidity conditions tighten.
- Commodities: Supply bottlenecks and rising fuel costs support energy prices, while industrial metals could benefit from strong manufacturing demand. Gold may struggle with rising yields but find support from inflation hedging.
- Currencies: The dollar is likely to strengthen on higher rate expectations, pressuring emerging market currencies and commodity-linked peers.
Key Takeaways for Investors
The September PMI report underscores a US economy running hot, but with mounting supply-side constraints that could prolong inflation and force the Federal Reserve to maintain a hawkish stance. Investors should watch for further upside in Treasury yields, which may continue to pressure equity valuations, especially in growth sectors. The combination of strong demand and rising costs favors pricing-power companies and commodities, while rate-sensitive assets may remain volatile. The October Fed meeting is now a live event, with a hike more likely than not. Portfolio positioning should account for stickier inflation, higher-for-longer rates, and the risk of earnings downgrades if cost pressures persist.
