US Business Activity Hits More Than Five-Year High as Inflation Pressures Build

American businesses are expanding at their fastest pace in more than five years, according to closely watched survey data released Wednesday — but the same report showed price pressures intensifying, complicating the outlook for the Federal Reserve.

The monthly purchasing managers’ survey, which tracks activity across manufacturing and services firms, pointed to the strongest overall growth since before the pandemic-era disruptions of the early 2020s. Companies reported stronger demand and busier order books, a sign that the world’s largest economy retains considerable momentum heading into the final stretch of the year.

But the strength came with a caveat. The same survey indicated that firms are paying more for inputs and, increasingly, passing those costs along to customers. Rising input and output prices in the survey have historically served as an early warning signal for consumer inflation, which tends to show up in official government data with a lag.

A two-sided story

For policymakers, the combination is an awkward one. Robust business activity is unambiguously good news for hiring, investment and corporate profits. It suggests that consumer and business demand has held up despite an extended period of elevated borrowing costs and repeated warnings of a slowdown.

At the same time, strong demand is precisely the environment in which companies feel comfortable raising prices. When order books are full, firms have less incentive to absorb higher costs for materials, transportation and labor in order to stay competitive. That dynamic risks stalling — or reversing — the progress made in cooling inflation since its post-pandemic peak.

The Federal Reserve has been navigating a narrow path, attempting to keep the economy growing without allowing price growth to re-accelerate. Data showing both faster activity and firmer prices gives ammunition to officials on either side of the debate: those who argue the economy can withstand tighter policy for longer, and those who fear that keeping rates elevated risks an eventual sharp downturn.

Services versus manufacturing

Surveys of this type typically break activity into services and manufacturing components, and the two sectors have often moved in different directions in recent years. Services — which account for the bulk of U.S. output and employment — have generally been the engine of growth, driven by consumer spending on travel, healthcare, dining and financial services. Manufacturing has been more uneven, sensitive to interest rates, inventory cycles and global trade conditions.

Economists caution that purchasing managers’ surveys measure the direction of change rather than its magnitude. A reading at a multi-year high signals that a large share of firms are reporting improvement compared with the previous month, not that output has returned to any particular level. The surveys are nonetheless valued for their timeliness, arriving weeks ahead of comparable official statistics.

What to watch next

Investors will be looking to upcoming inflation and labor market releases to confirm whether the survey’s warning on prices is borne out in the broader data. If official measures of consumer and producer prices firm up in line with the survey, expectations for interest rate cuts could be pushed further out. If they do not, the episode may prove to be noise rather than a turning point.

For now, the message from American businesses is that demand is strong — and that strength is starting to show up in what they charge. Read More