US service sector activity recorded the fastest growth rate in more than five years! The PMI rose to 58.8 in September when demand was strong, and inflationary pressure heated up again

The Zhitong Finance App learned that data released by S&P Global on Monday showed that US service sector activity accelerated sharply in September. The service sector PMI business activity index rose from 56.5 in August to 58.8, rising for the fourth month in a row, and was in the expansion range for the sixth month in a row, setting the fastest expansion rate since July 2021. At the same time, the growth rate of new orders rose to the highest level in four and a half years, and employment growth was the fastest since June 2022, but investment cost inflation also clearly rebounded to the highest level since November 2022, indicating that while the momentum of US economic growth is increasing, inflationary pressure cannot be ignored.

The service sector PMI rose to 58.8, and the growth rate of new orders hit a four-and-a-half year high

According to the data, commercial activity in the US service sector accelerated markedly in September. The S&P Global US Services PMI Business Activity Index rose to 58.8, up from 56.5 in August. The latest expansion was the biggest in more than five years. Notably, the five major industries covered by the survey all achieved output growth for the first time in 10 months. Among them, the transportation and warehousing industry resumed expansion, while the information and communication industry showed the most prominent growth rate.

Strong demand is the main driving force driving the acceleration of service sector activity. New orders in the service sector continued to increase sharply in September, and the growth rate further accelerated to the highest level in four and a half years. Companies particularly mentioned the strong performance of domestic demand in the US. Although the growth rate of new export orders is significantly lower than the overall new business, it has been growing for the second month in a row, and the growth rate is the same as the 20-month high set in August.

Service companies are further expanding recruitment as orders grow rapidly. The number of employed people increased for the third month in a row in September, and the employment growth rate reached the fastest rate since June 2022. Even as the company actively expands its workforce, the strength of new orders still exceeds the company's digestible capacity. The volume of uncompleted business increased for 19 consecutive months, and the growth rate hit one of the fastest levels in nearly four and a half years.

Businesses are also becoming more optimistic about future business prospects. According to the survey, service companies' confidence in output growth in the next 12 months has risen to a one-year high. Companies attribute optimistic expectations to new product launches, new customer increases, existing customer referrals, and future growth in new orders. At the same time, some companies also expect an easing of inflationary pressure.

Investment cost inflation hit one of the fastest in nearly four years, and price pressure is heating up again

However, while economic activity is accelerating, price pressure on the US service sector has increased markedly.

According to the data, after falling to a 16-month low in August, investment cost inflation in the service sector rebounded sharply in September to the fastest level since November 2022. Companies generally mentioned the rise in gasoline prices and transportation costs, and some companies also indicated that labor costs have increased. At the same time, the increase in output prices of service companies has further accelerated, reaching the second highest level in the past year, after July of this year.

Chris Williamson, chief business economist at S&P Global Markets Finance Intelligence, said that looking at the comprehensive goods and services industry, investment costs for US companies are currently rising at the fastest rate in nearly four years. Although part of this is due to rising fuel prices, what is more noteworthy is that the increase in corporate sales prices has also accelerated again, indicating that inflation remains stubbornly above the Federal Reserve's 2% target.

This also means that a new acceleration in US economic growth may cause the Federal Reserve to face a more complicated policy environment. On the one hand, economic activity and employment remained strong; on the other hand, cost and sales price pressures picked up at the same time, further cooling inflation faced challenges.

The composite PMI rose to 58.4, and S&P Global expects the US economy to grow by about 4% in the third quarter

Not only was the service sector showing strong performance, but overall business activity in the US also accelerated further in September.

The S&P Global US Composite PMI Output Index rose from 56.0 in August to 58.4 in September, the highest level in more than five years. Both manufacturing and service industries have achieved accelerated growth, new orders are increasing rapidly, and companies are expanding recruitment at the fastest rate since June 2022. At the same time, the growth rate of investment costs in the integrated goods and services industry rose to the fastest rate since October 2022, and the increase in corporate output prices also accelerated.

Williamson said that in September, the growth of business activity in the US rose to the highest level in more than five years, and improved demand and increased corporate optimism drove recruitment to the fastest rate in more than four years. Combined with the steady performance of manufacturing PMI data, the strong expansion of the service sector means that the US economy may reach an annual growth rate of about 4% in the third quarter, while the growth rate corresponding to the growth momentum in September alone may reach about 5%, which suggests that the economy is still accelerating further as it enters the fourth quarter.

From an industry perspective, technology companies are reporting the strongest growth, but improvements in economic activity are no longer limited to a few sectors. Growth in consumer-related businesses, industry, and healthcare has accelerated, and the financial services sector has maintained steady expansion.

Overall, the September PMI data showed that the US economy showed clear signs of acceleration at the end of the third quarter, and service sector demand, orders, employment, and business confidence strengthened at the same time. However, rising costs and sales prices along with the acceleration of economic growth have further exacerbated market concerns about inflationary stickiness. For the Federal Reserve, future policy decisions may require seeking a balance between strong economic growth and inflationary pressure that continues above target.