US service-sector growth surges to July 2021 high, PMI data shows

• S&P global composite index for September came in at 58.4, matching the preliminary reading. That compares with 56.0 a month earlier.
• The services PMI was 58.8, versus the preliminary 50.7 and 56.5 in the prior month.

Details

• Services PMI: 58.8, up from 56.5. This marks the quickest expansion in business activity since July 2021.
• Composite PMI: 58.4, compared with 56.0 previously. The overall business activity increase was the strongest in more than five years.
• New orders: Growth picked up to its fastest rate in four and a half years, driven by domestic demand.
• Employment: The service sector added jobs at the quickest pace since June 2022.
• Input costs: Inflation accelerated to its highest level since November 2022.
• Prices charged: Rose at the second-fastest clip in just over a year, only trailing July.
• Backlogs: Rose for the 19th month in a row, with the sharpest accumulation in nearly four and a half years.
• Business confidence: Improved to a one-year peak.

According to the S&P Global release, US service-sector growth accelerated sharply in September. The business activity index climbed to 58.8 from 56.5 in August, registering a fourth consecutive monthly gain and the strongest expansion since July 2021.

The improvement was broad-based. For the first time in 10 months, all five service-sector categories reported increased activity, with transport and storage returning to growth. Information and communication led the expansion. Strong domestic demand drove new-order growth to a four-and-a-half-year high, encouraging companies to step up hiring. Despite those additional workers, unfinished business accumulated at a faster pace.

However, the stronger activity was accompanied by renewed inflation pressure. Companies reported higher gasoline and transportation costs, along with increased labor expenses. Input cost inflation accelerated sharply after easing in August, and businesses raised their selling prices more quickly. The composite index, which covers both manufacturing and services, rose to 58.4 from 56.0, reinforcing the picture of stronger growth alongside rising costs.

What did S&P Global Economist say about the report?

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said the surveys point to an economy gaining momentum, but with inflation pressures building alongside it.

• Growth is accelerating: The manufacturing and services surveys suggest economic growth of around 4% in the third quarter, with September alone signaling a 5% pace and stronger momentum heading into the fourth quarter. These are survey-based estimates, rather than official GDP figures.
• Demand is driving hiring: Rising orders and greater confidence encouraged companies to increase staffing at the fastest pace in over four years. Backlogs are also building, suggesting demand is stretching capacity.
• The expansion is broadening: Technology remains the clear leader, but consumer-facing businesses, industrials and healthcare are also seeing faster growth. Financial services continues to expand solidly.
• Confidence is improving: Expectations for future growth reached a one-year high, pointing to potential further gains in activity.
• Inflation is the concern: Across manufacturing and services, input costs are rising at their fastest pace in nearly four years. Higher fuel costs explain part of the increase, but companies are also raising selling prices more quickly.

The takeaway: Williamson sees stronger growth carrying into the fourth quarter. However, the accompanying rise in prices raises the risk that the economy is running too hot, with inflation remaining stubbornly above the Fed’s 2% target.

Quick analysis: Stronger demand. More hiring. Higher prices. That combination gives the Fed more reason to remain cautious about easing policy. For traders, it could support the USD and Treasury yields if it reinforces expectations that interest rates will stay elevated. Equities face competing influences: stronger activity supports revenue prospects, while higher costs and yields could pressure margins and valuations. The key question is whether the renewed price pressure persists.

What this report measures: The Purchasing Managers’ Index (PMI) is a monthly business survey tracking changes in activity, orders, employment and prices. A seasonally adjusted reading above 50 signals expansion compared with the previous month; below 50 signals contraction. The composite combines manufacturing and services, helping traders assess broader economic momentum.

At 10 AM the Non-Manufacturing ISM index will be released with the estimate of 55.2 vs 55.4 last month. The employment component last month was 47.8 below the 50.0 level. The new orders index was at 60.9 while the prices paid was elevated at 72.6. Pay attention to those components.

US stocks are maintaining their gains at least in the broader indices with S&P up 0.17% and the NASDAQ index up 0.57%. The Dow industrial average is still lower by -0.55%. The NASDAQ 100 is up 0.36%.

US yields are moving to the upside out the curve with the 10 year now up 2.76 basis points. The 2 year is down -2.4 basis points