U.S. business activity accelerated sharply in September, with the latest private-sector survey showing the strongest expansion in more than five years. The improvement points to resilient underlying demand, but the simultaneous rise in input costs and supply-chain pressures presents a more complicated picture for the Federal Reserve as it balances economic strength against persistent inflation.

Composite PMI Signals Stronger Economic Momentum

S&P Global’s flash U.S. Composite PMI Output Index increased to 58.4 in September from 56.0 in August, marking its highest reading since July 2021. A PMI reading above 50 indicates expansion, making the latest result a significant acceleration in private-sector activity. The improvement was supported by stronger conditions across both manufacturing and services, suggesting that economic momentum is becoming broader rather than being concentrated in one segment.

The increase also reinforces recent evidence that U.S. demand remains resilient. Richmond Fed President Tom Barkin said earlier this week that economic conditions were, if anything, firming, citing continued consumer spending and strength outside the artificial intelligence investment boom.

New Orders Reach Their Strongest Level Since 2022

One of the most important components of the September survey was the acceleration in new orders. The measure reached its highest level since March 2022, with stronger demand reported across both manufacturing and services. Rising new business generally provides an important forward-looking signal because it indicates that companies are entering the coming months with a larger pipeline of activity.

However, the strength of demand is also creating operational constraints. Work backlogs reached their highest level since May 2022, suggesting that companies are accumulating unfinished orders as available capacity struggles to keep pace. The combination of strong new orders and rising backlogs can support future output, but it can also increase pressure on labor, materials and transportation networks.

Supply Constraints Are Feeding Inflation Risks

The inflation component of the survey provides the principal complication. The measure of input prices rose to its highest level in nearly four years, while supplier delivery times lengthened sharply. The development suggests that businesses are encountering higher costs at the same time that demand is strengthening, creating conditions in which companies may have greater ability or incentive to pass higher costs through to customers.

Supply-chain pressures have already been visible in recent PMI data. S&P Global reported in August that supplier delivery times were lengthening by one of the greatest amounts seen over the previous four years, while rising backlogs were reported in both manufacturing and services.

The latest figures therefore add to concerns that inflation may prove more persistent than previously expected. S&P Global has also warned that renewed energy and supply-chain pressures could keep global inflation elevated, particularly amid ongoing Middle East disruptions affecting energy and logistics.

Fed Faces a More Difficult Policy Balance

The September PMI arrives shortly after the Federal Reserve raised its policy rate to a 3.75% to 4.00% target range. Barkin said inflation risks currently outweigh employment risks and argued that the latest rate increase should help return inflation toward the Fed’s 2% objective.

For markets, the key question is whether stronger activity eventually translates into sustained price pressure. New orders, input costs, supplier delivery times and backlogs will remain important indicators in the coming months. If demand continues to accelerate while capacity remains constrained, the Fed could face greater pressure to maintain restrictive monetary conditions, with implications for Treasury yields, the dollar and global equity valuations. Conversely, an easing in supply constraints could allow strong activity to continue without producing an equivalent increase in inflation.