By yourNEWS Media Newsroom.
WASHINGTON — U.S. service-sector activity expanded in September at the fastest pace in more than five years, with technology businesses leading a broad-based acceleration as stronger customer demand prompted companies to increase hiring and left firms struggling to keep up with incoming orders.
The S&P Global U.S. Services PMI Business Activity Index climbed to 58.8 in September from 56.5 in August, marking its fourth consecutive monthly increase and the strongest reading since July 2021.
Any reading above 50 indicates an increase in business activity from the previous month.
The latest figures show the service economy gaining momentum as the third quarter ended, while separate manufacturing data also remained firmly in expansion territory.
S&P Global’s Composite PMI Output Index, which combines manufacturing and services, increased to 58.4 from 56.0 in August, signaling the fastest overall private-sector expansion in more than five years.
The September performance continued a trend already evident in S&P Global’s preliminary survey, which showed the United States outperforming other major advanced economies in both manufacturing and services.
“Tech companies are reporting by far the strongest growth but the rising tide is now lifting all boats as far as the major sectors are concerned,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Williamson said acceleration was also evident among consumer-facing companies, industrial services and health care businesses, while financial services continued to report solid expansion.
All five broad service-sector categories tracked by the survey recorded growth in September for the first time in 10 months.
Information and communication companies posted by far the strongest expansion, while transportation and storage returned to growth after previously contracting.
The breadth of the increase is significant because it indicates that September’s strong headline figure was not being driven by only one or two industries.
Demand strengthened sharply as well.
New business increased at the fastest rate in approximately four and a half years, with companies reporting particularly strong domestic demand.
Export business increased for a second consecutive month, although international demand grew much more slowly than total new orders. The pace of export-order growth matched August’s 20-month high.
The increase in demand encouraged businesses to add workers for a third consecutive month.
Employment rose at the fastest rate since June 2022 as service providers expanded staffing to handle rising workloads.
Some businesses reported they were finally able to fill positions that had previously remained vacant.
Despite the additional workers, companies continued to fall behind.
Outstanding business increased for the 19th consecutive month, with backlogs accumulating at the fastest rate in nearly four and a half years.
The increase was also among the strongest recorded in the history of the survey.
That combination — accelerating orders, stronger hiring and rapidly growing backlogs — suggests demand was increasing faster than companies could expand their capacity.
Williamson said the strength in services, combined with a solid manufacturing performance, pointed to substantial economic growth during the third quarter.
“Combined with the encouragingly solid manufacturing PMI, the strong service sector expansion points to economic growth of around 4% in the third quarter and 5% in September alone, the latter hinting at accelerating momentum into the fourth quarter,” Williamson said.
Those figures are estimates derived from historical relationships between S&P Global’s surveys and official economic data. They are not government measurements of gross domestic product.
Official third-quarter GDP figures will be released separately by the Bureau of Economic Analysis.
Manufacturing data nevertheless provide additional evidence that economic activity remained strong in September.
The Institute for Supply Management’s September manufacturing survey showed the factory sector expanding for a ninth consecutive month, with the Manufacturing PMI at 54.5.
New manufacturing orders increased more quickly, employment strengthened and backlogs rose sharply.
The growth in both major sectors has helped broaden the expansion.
Service companies also became more optimistic about the next 12 months.
Business expectations reached their highest level in a year as companies cited anticipated increases in orders, new customers, new products and referrals from existing clients.
Some businesses also expressed hope that operating-cost pressures would eventually moderate.
September, however, provided little evidence of immediate relief on prices.
Input-cost inflation in the service sector accelerated sharply after slowing to a 16-month low in August.
Service companies reported the fastest increase in operating expenses since November 2022.
Businesses frequently cited higher gasoline prices and increased transportation costs, while labor expenses also contributed to rising costs.
Companies responded by raising their own prices more quickly.
The rate of selling-price inflation among service providers was the second strongest in just over a year, exceeded only by July.
Price pressures were also elevated in manufacturing.
ISM’s manufacturing Prices Index jumped to 77.9 in September from 71.1 in August, with businesses reporting higher prices for steel, aluminum, petroleum-related products, transportation and other materials.
ISM attributed some of those increases to tariffs and higher energy prices associated with conflict in the Middle East.
Across manufacturing and services combined, S&P Global found that input prices increased at the fastest rate since October 2022.
Selling prices also rose at a faster pace.
Williamson said the price data could raise concerns that economic growth is running faster than can be sustained without generating additional inflation.
The Federal Reserve seeks inflation averaging 2% over time, and policymakers closely monitor whether strong demand is allowing businesses to continue passing higher costs to customers.
A strong economy does not automatically produce problematic inflation, but rapid demand growth combined with rising costs can complicate decisions over interest rates.
September’s surveys therefore presented policymakers with two competing signals.
On one side, businesses reported accelerating economic growth, stronger hiring, increased orders and rising confidence.
On the other, they reported renewed cost pressures and faster price increases.
A separate measure from the Institute for Supply Management also showed the service economy remaining solidly in expansion, though its index recorded a modest slowdown.
The ISM Services PMI registered 54.9 in September, down from 55.4 in August but remaining comfortably above the 50 level dividing expansion from contraction.
It marked the 27th consecutive month of expansion in ISM’s services index.
Business activity declined to 56.5 from 61.7, while the New Orders Index remained strong at 59.8 compared with 60.9 in August.
The employment component returned to growth, increasing to 50.1 from 47.8.
Thirteen service industries reported expansion, one more than in August.
Although the S&P Global and ISM surveys use different panels, weighting systems and methodologies, both pointed to continued expansion in September.
The biggest difference was the pace.
S&P Global reported a sharp acceleration to a five-year high, while ISM found growth remaining strong but easing slightly from August.
Both surveys nevertheless showed demand holding up and employment conditions improving.
The S&P Global services survey is based on responses from approximately 400 companies across industries including transportation, information, communications, finance, insurance, real estate and business and consumer services.
Responses for the September report were collected between Sept. 10 and Sept. 28.
The findings add to a series of recent indicators suggesting the U.S. economy entered the fall with significant momentum.
Manufacturing has expanded for nine consecutive months according to ISM, service activity remains comfortably above contraction levels, and S&P Global’s combined private-sector output measure has reached its strongest level since 2021.
The September data also suggest that the expansion is becoming less concentrated.
For the first time in 10 months, every broad service-sector category tracked by S&P Global reported growth.
Technology remains the strongest segment, but Williamson said the acceleration is increasingly visible throughout the economy.
At the same time, surging backlogs show that businesses are having difficulty keeping pace with the growth in demand.
That could encourage further hiring and investment if companies believe the increase in orders will persist.
It could also add to inflation pressure if capacity shortages allow firms to raise prices.
For now, the September surveys depict an economy expanding at a considerably faster pace than earlier in the year.
“Tech companies are reporting by far the strongest growth,” Williamson said, “but the rising tide is now lifting all boats as far as the major sectors are concerned.”
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