Data released by S&P Global on Monday showed that US services activity accelerated sharply in September, with the Services PMI Business Activity Index rising to 58.8 from 56.5 in August, marking a fourth consecutive monthly increase and a sixth straight month in expansion territory, the fastest pace of expansion since July 2021.

At the same time, new order growth climbed to its highest level in four and a half years, employment growth hit its fastest since June 2022, but input cost inflation also rebounded notably to its highest since November 2022, indicating that while US economic momentum is strengthening, inflationary pressures remain a concern that cannot be ignored.

Services PMI rises to 58.8 as new order growth hits four-and-a-half-year high

The data showed that US services business activity accelerated significantly in September. The S&P Global US Services PMI Business Activity Index rose to 58.8, up from 56.5 in August, the largest expansion in more than five years.

Notably, all five sectors covered by the survey reported output growth for the first time in ten months, with transportation and warehousing returning to expansion, while information and communication services posted the most pronounced growth.

Robust demand was the main driver behind the acceleration in services activity. New orders in the services sector continued to rise sharply in September, with growth further accelerating to its highest level in four and a half years, as firms particularly cited strong domestic demand in the US. Although new export order growth was significantly lower than overall new business, it rose for a second consecutive month, with the pace matching the 20-month high set in August.

With orders rising rapidly, services firms further expanded hiring. Employment rose for a third consecutive month in September, with job growth reaching its fastest pace since June 2022. Even as firms actively expanded their workforce, the strength of new orders still exceeded their capacity to keep up, with backlogs of work rising for a 19th consecutive month and at one of the fastest rates in nearly four and a half years.

Businesses also became more optimistic about future operating prospects. The survey showed that services firms' confidence in output growth over the next 12 months rose to a one-year high. Companies attributed their optimistic outlook to new product launches, new client acquisitions, referrals from existing customers and expected future new order growth, while some also anticipated an easing of inflation pressures.

Input cost inflation among fastest in nearly four years as price pressures reignite

However, alongside accelerating economic activity, price pressures in the US services sector intensified notably. The data showed that services input cost inflation, after falling to a 16-month low in August, rebounded sharply in September to its fastest level since November 2022. Firms widely cited rising gasoline prices and transportation costs, with some also reporting higher labor costs. Meanwhile, output price increases at services firms also further accelerated, reaching the second-highest level in over a year, surpassed only by July this year.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that across both goods and services, US firms' input costs are currently rising at the fastest pace in nearly four years. Although part of this stems from higher fuel prices, more noteworthy is that firms' selling price increases have also reaccelerated, showing that inflation remains stubbornly above the Federal Reserve's 2% target.

This also means that a reacceleration of US economic growth could put the Federal Reserve in a more complex policy environment. On one hand, economic activity and employment remain strong; on the other, cost and selling price pressures are rising in tandem, making further disinflation challenging.

Composite PMI rises to 58.4 as S&P Global expects US third-quarter growth of about 4%

Not only did services perform strongly, but overall US business activity also further accelerated in September. The S&P Global US Composite PMI Output Index rose to 58.4 in September from 56.0 in August, the highest level in more than five years. Both manufacturing and services posted accelerating growth, with new orders rising rapidly and driving firms to expand hiring at the fastest pace since June 2022. At the same time, input cost growth across goods and services combined rose to its fastest since October 2022, and firms' output price increases also accelerated.

Williamson said that US business activity growth rose to its highest level in more than five years in September, with improving demand and stronger business optimism driving hiring at the fastest pace in over four years. Combined with solid manufacturing PMI data, the strong services expansion suggests that US economic growth in the third quarter could reach about 4% on an annualized basis, while the growth momentum in September alone could correspond to a pace of about 5%, implying that the economy is further accelerating as it enters the fourth quarter.

By sector, technology firms reported the strongest growth, but the improvement in economic activity is no longer confined to a few areas. Growth accelerated in consumer-related firms, industrials and healthcare, while financial services also maintained solid expansion.

Overall, the September PMI data showed that the US economy exhibited clear signs of acceleration at the end of the third quarter, with services demand, orders, employment and business confidence all strengthening in tandem. However, the rise in costs and selling prices accompanying faster economic growth has further intensified market concerns about sticky inflation. For the Federal Reserve, future policy decisions may require balancing strong economic growth against inflation pressures that remain persistently above target.