US businesses ended the summer on a strong note. A fresh wave of new orders pushed overall activity to its highest level in five years, according to a closely watched survey. But the same report also flagged a familiar problem: supply chains are straining again, and the cost of materials is climbing. That combination could make the Federal Reserve's job harder as it tries to balance growth against inflation.
What the data shows
S&P Global, a market-research firm, said its flash US Composite PMI Output Index rose to 58.4 in September, up from 56.0 in August. The index is a gauge of business activity across both services and manufacturing. Any reading above 50 signals expansion, so 58.4 points to a brisk pace of growth.
The jump was driven by a surge in new orders, with strength showing up in both the services sector and factories. S&P Global said the survey results are consistent with the economy growing at an annualized rate of about 5% — a figure that lines up with the Atlanta Fed's own GDP tracking estimate.
That kind of growth would be welcome news for investors, but the report also contained a cautionary note. Suppliers are taking longer to deliver goods, and input prices are rising. Those are classic signs that demand is outpacing supply, which can feed into higher consumer prices down the road.
Why supply bottlenecks and costs matter
For the Federal Reserve, the stakes are clear. The central bank has been trying to cool inflation without tipping the economy into recession. Strong growth gives the Fed room to keep interest rates higher for longer, but rising input costs could reignite inflationary pressures just as policymakers thought they were getting inflation under control.
If businesses are paying more for materials and struggling to get parts on time, they may pass those costs on to customers. That would show up in consumer prices, potentially undoing some of the progress made in recent months. It's a delicate balancing act, and the September PMI data suggests the Fed may not be done yet.
Investors have been watching this tension closely. The prospect of higher-for-longer interest rates has already weighed on markets, and any sign that inflation is heating up again could prompt a reassessment of rate expectations. For context, other central banks are also grappling with inflation risks, as Hungary's central bank recently paused its rate-cutting cycle for similar reasons.
What it means for investors
For everyday investors, the PMI report is a reminder that the economy is still growing, which is generally supportive for corporate earnings and stock prices. But it also underscores that inflation is not fully vanquished. If supply bottlenecks persist and costs keep rising, companies may see their profit margins squeezed, even as revenue grows.
That could lead to mixed earnings reports in the coming quarters. Companies with strong pricing power — the ability to raise prices without losing customers — may fare better than those that have to absorb higher costs. Investors should watch how companies talk about input costs and supply chains in their next earnings calls.
The data also has implications for interest rates. If the Fed sees inflation risks rising again, it may hold off on cutting rates, which would keep borrowing costs higher for mortgages, car loans, and credit cards. That's a direct hit to household budgets, and it could slow consumer spending, which is the backbone of the US economy.
On the other hand, if the economy is truly growing at a 5% annualized pace, that gives the Fed more confidence to keep rates elevated without worrying about tipping into recession. It's a fine line, and the next few months of data will be crucial.
Looking ahead
The flash PMI is an early read on the month, and the final reading could be revised. But the September numbers are a clear signal that the US economy entered the fourth quarter with momentum. The key question is whether that momentum can continue without reigniting inflation.
Investors will be watching upcoming inflation reports, jobs data, and the Fed's next policy meeting for clues. The mixed signals in oil markets add another layer of uncertainty, as energy prices feed directly into inflation. And with global markets looking stretched, the US economy's resilience will be a key factor for investors worldwide.
For now, the message is cautiously optimistic: growth is strong, but the battle against inflation isn't over. Investors should stay diversified and keep an eye on how companies navigate the challenges ahead.
