Business growth surges to fastest for over five years and job gains accelerate, but price pressures also intensify amid spike in costs

This is what spooked markets yesterday.

The headline flash S&P Global US PMI Composite Output Index rose from 56.0 in August to 58.4 in September, registering the fastest expansion since July 2021 and an acceleration of growth for a fourth successive month. Growth was driven by the service sector, which reported the steepest rise in output for over five years, but a welcome development in September was an accompanying acceleration of manufacturing output growth to the fastest since April 2022.

New order inflows also gathered pace in both sectors, with growth reaching the highest since March 2022 in the service sector and the highest since April 2022 in manufacturing. In both cases, demand was buoyed principally by the domestic market, as goods export volumes continued to fall and services exports rose only modestly.

Companies’ backlogs of uncompleted orders, a key indicator of capacity utilization and future business growth, rose in September at the sharpest rate since May 2022, having accumulated at increased rates in both manufacturing and services.

The rise in backlogs of work encouraged firms to take on more staff. Employment consequently rose in September at a rate not seen since June 2022 and a pace rarely exceeded since comparable data were first available in 2009. Both service sector and manufacturing payrolls increased, the former at the fastest rate since June 2022 and the latter notably to the greatest extent since February 2021.

Business output expectations for the year ahead were unchanged in September, having regained their pre-war level in recent months. Business expansion plans reflected reports of confidence being buoyed by signs of ongoing demand growth and economic resilience. Manufacturers remained more upbeat than service providers, and factory confidence has more or less returned to its long-run average. In contrast, service providers’ sentiment remained well below trend level amid worries over cost-of-living concerns, higher borrowing costs and political uncertainty.

Price pressures intensified in September. Average input costs measured across both goods and services surged higher, the overall rate of inflation hitting the highest since October 2022. The increase was blamed widely on higher fuel and transport costs, though wage pressures were also noted to have picked up in many cases.

In manufacturing, high raw materials prices were also often linked to supply shortages; suppliers’ delivery times lengthened markedly again in September on average, with the incidence of supply chain delays the most widespread since July 2022. Input cost inflation in manufacturing nonetheless remained below the peaks seen earlier in the year, during the initial months of the war in the Middle East. Service sector input cost inflation hit the highest since November 2022.

Selling price inflation also picked up in September, though was muted by competition in some instances, notably in the service sector. While above that seen in August, September’s overall selling price rise was below the rates seen between March and July.

The S&P Global US Manufacturing PMI jumped from 53.9 in August to 57.0 in September, according to the flash reading, registering the strongest improvement in business conditions since May 2022.

All five components helped boost the PMI. Production growth revived after having waned over the prior three months, reaching its fastest since April 2022, as new orders growth also accelerated to the fastest in nearly four-and-a-half years. Jobs growth hit the highest since February 2021, and inventories rose at an increased rate. Suppliers’ delivery times meanwhile lengthened to the greatest degree since July 2022.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“US business continues to boom, with output growing at the fastest rate for over five years in September.Historical comparisons suggest that the latest survey data point to annualized growth of around 5% with a 4% gain now signalled for the third quarter as a whole.

“To put the growth surge in context, barring the spike in demand following the opening up of the economy after the COVID-19 lockdowns, the latest improvement in business activity is the greatest recorded since early 2015.Business is clearly booming now in both manufacturing and services.

“However, this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded, with companies also reporting increasing problems finding suitable staff. Backlogs of work are consequently rising sharply. While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook.

“Firms’ input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices seen during the month, which will add further to the upward pressure on selling prices and inflation in the coming months.”

The Services PMI has thus jumped from 54.6 in July to 56.5 in August and now to 58.7 in September with strong new orders. The September Manufacturing PMI’s 3.1 points jump to 57.0 with accelerating new orders confirms that “Business is clearly booming now in both manufacturing and services”. Add “the most severe supply chain bottlenecks seen in the near-two-decade survey history” and the ingredients are there for sustained inflation in coming months.

Supply shortages with little prospects for improvements provide strong pricing power, everything feeding on itself.

Last September 4, I suggested that the US was in boomflation mode. US 10Y Ts, then at 4.76%. With the increasing evidence and a clearly hawkish FED, yields jumped to 5.13%, the highest since 2004.

Fed’s Williams Says More Work Needed to Lower US Inflation

Federal Reserve Bank of New York President John Williams said there is still a lot of work to do on inflation given high energy prices and demand driven by investment in artificial intelligence.

Williams said market expectations for another interest-rate hike by the end of the year is a “reasonable way of thinking about it, but we’ll have to see.”

He said the US economy has shown “remarkable resilience despite significant shocks” and the labor market is “solid.” However, he pointed to lingering inflation risks from the ongoing US-Iran war and “pretty strong demand from AI.”

Swap markets now fully reflect three quarter-point hikes over the next year from the Fed, with significant hedging for a fourth.

Ed Yardeni:

The 2-year US Treasury note yield is predicting four rate hikes over the next 12-24 months.

(…) the risks now clearly point to more upside in yields. A relief rally in bond prices would probably require a resolution of the war in the Middle East that would lower oil prices. Another possibility is that US Treasury Secretary Scott Bessent will act to bring bond yields down by buying back more Treasury bonds and issuing more Treasury bills. (…)

So far, the bond yield remains below the growth rate of nominal GDP, which was 6.6% y/y during Q2-2024 and will probably be even higher during Q3-2024 (chart). In the past, especially during the 1980s, the Bond Vigilantes pushed the bond yield above nominal GDP to slow the economy. They haven’t done that so far. The risk is that they will do that if the Fed fails to subdue inflation.

• Iran President Sends US Defiant Message Over Potential Talks

Iranian President Masoud Pezeshkian said his country won’t allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place, underscoring the difficulty in reaching a peace deal with Washington despite efforts to revive talks this week.

The Islamic Republic “cannot accept that everyone benefits from the waterway while, at the same time, the historic guardian of that waterway is deprived because of the oppressive sanctions,” he said in an address to the United Nations General Assembly in New York on Wednesday.

Iran is ready to resume talks about ending the near seven-month conflict with the US but will not respond to threats, he added. While the country isn’t seeking to build an atomic weapon, it won’t give up the right to develop nuclear technology for economic purposes, he said.

Pezeshkian’s address laid out a number of conditions before any meaningful talks with the US can resume, undermining tentative signs of diplomatic progress that emerged this week in New York. (…)

“This is what Trump and others that want to bully us have to comprehend: we are ready for dialogue, but they must understand we won’t accept the language of force,” Pezeshkian said.

Iran was represented in talks in New York by Foreign Minister Abbas Araghchi, who outlined Tehran’s “firm positions” on reopening the Strait of Hormuz, according to state media. Those conditions include the US immediately lifting a naval blockade, unfreezing Iranian assets and ending the war “on all fronts,” IRIB News reported, an apparent reference to Israel’s campaign against Iran-backed Hezbollah militants in Lebanon. (…)

• Mortgage Rates at 7% Are Forcing Home Sellers to Slash Prices

(…) Sellers are already feeling the strain. Nearly one in five homes for sale had a price cut in August, the highest share for that month in Redfin data going back to 2020, while 45% of August sales involved a seller concession. The typical home spent 50 days on the market, up from 36 when rates were approaching 8% almost three years ago. And with 1.5 million homes for sale — up 46% from 2023 — buyers have more room to negotiate. (…)

It’s a Good Time to Buy Bonds

An Oped in the WSJ by Burton G. Malkiel, a proponent of the efficient-market hypothesis.

(…) Tax-exempt bonds today offer unusually high returns. AA-rated long-term bonds from high-tax states like New York, New Jersey and California can be purchased at yields of 5%. This yield would be equivalent to a pretax yield of double that amount for an investor in the highest tax bracket. Even if the inflation rate increases, that return should comfortably exceed it. Such a return would compare favorably with the returns from common stocks with far less volatility.

Long-run Treasury Inflation-Protected Securities are also attractively priced. TIPS pay a real rate of interest plus an upward adjustment to the face value of the bond to account for the yearly inflation rate. Today 20-year TIPS have a real yield of about 3%. If the inflation rate remains at 3%, they would provide a total return of 6% a year. If inflation accelerates, investors would be protected with a higher return. The interest on TIPS is subject to federal taxation, including the upward inflation adjustment. But TIPS remove the risk to portfolios of spiraling inflation. They are also exempt from state and local taxes. Both tax-exempt municipal bonds and TIPS are unusually attractive today and deserve a place in investors’ portfolios: municipals for taxable portfolios, TIPS for nontaxable retirement ones.

When considering these investment strategies, however, it is important to consider what could go wrong. The U.S. is saddled with a more than $40 trillion debt and a debt-to-GDP ratio of more than 100%, near the historic high reached in 1946 after World War II. Moreover, we appear to have an intractable annual budget deficit. Higher economic growth spurred by increasing productivity will help, but even under optimistic projections, the ratio of debt to national income will rise in coming years. The risks of increasing inflationary pressures are real. So are the risks of a financial crisis and increasing interest rates. Increasing rates would hurt all bonds. Of course equities might suffer as well. TIPS would probably fare best, particularly if such rate increases were accompanied by rising inflation.

It’s also important to consider how the government might react to a mounting debt crisis. After World War II, the policy response was financial repression. Interest rates on the federal debt were capped at the low rate of 2.5%. Inflation accelerated, and we inflated the debt away. If a similar scenario were to unfold in the coming years, all bonds would do well, especially TIPS. When Treasury Secretary Scott Bessent talks of buying long-term bonds to keep interest rates from rising, one can’t help but consider that the federal government might attempt a financial repression policy.

Another possible scenario is that the federal government gets serious and takes steps to rein in future deficits. Spending could be constrained and revenue increased. Whatever fiscal package one imagines, some part of it would involve higher taxes on corporations and individuals. If Democrats win both Congress and the White House, higher taxes on high-income individuals are virtually assured. In this case, tax-exempt securities would be the biggest beneficiary.

No one knows what the future holds, but under the various likely government responses to our economic problems, bonds should be resilient. What we do know is that high interest rates and continued huge federal deficits aren’t sustainable. Already, we spend more on interest payments to finance the national debt than we spend on national defense. And higher interest rates would have a negative effect on economic activity and the future growth we need to service our debt. A government intervention of some kind appears inevitable—and having an allocation to long-term bonds such as municipals and TIPS is highly likely to improve portfolio performance.

The Fed’s John Williams is right saying “there’s a lot of work to do on inflation”. Problem is, how much?, when the main reasons behind boomflation are his government and AI.

David Rosenberg:

World debt at all levels has soared +$10 trillion in the first half of 2026 to a nosebleed $365 trillion. That is equivalent to 310% of global GDP. You read that right — global debt is more than 3x bigger than the global economy, and financing this extreme liability at a 5% interest rate is a far different place than funding the largesse at 2%.

The last time market interest rates were at today’s level, back in 2007, the level of world debt was $142 trillion and less than a 270% share of the global economy.

The risks are far more acute today from a refinancing-risk perspective, and one really has to wonder how much longer credit spreads will remain at such tight levels, not to mention how it is possible that, in this unstable state, the gold price doesn’t make it back to the early 2026 highs, or blow past those levels, before long. (…)

The fact that the Fed is clearly willing to tighten aggressively into a supply shock as opposed to a demand shock is something we have not seen since the Volcker era of the early 1980s.

This is not 2021-2023, where there was a powerful inflationary demand shock from fiscal stimulus checks hitting just as the economy was reopening and the government was paying people handsome sums not to work. I can’t see how this ends well because getting to the +2% inflation target in this type of shock will require demand contraction.

Treasury Secretary Scott Bessent has intentionally concentrated its fundraising at the front end of the yield curve in 2026. Adam Tooze today:

BofA’s estimate would take the stock of outstanding bills to roughly $8tn, or 24.3 per cent of marketable Treasury debt, by next September. Goldman has the figure reaching 24.3 per cent next year and 24.9 per cent in 2028, putting it close to a recent peak reached during the pandemic.

That is against an official target of “around 20 per cent over time”, set out by the Treasury Borrowing Advisory Committee, a group of market participants who advise the Treasury, as a good trade-off “between interest rate costs and the volatility of debt financing and rollover risk”.

Just when the Fed is launching a blind hike…

Euro-Zone Business Activity Hits Three-Year High on Services

Private-sector activity in the euro area grew at the fastest pace in more than three years as the service sector unexpectedly improved.

The Composite Purchasing Managers’ Index compiled by S&P Global increased to 53.1 from 52 in August, well above the 50 threshold separating growth from contraction. Analysts in a Bloomberg survey had anticipated a small decline to 51.7.

The region’s two largest economies both exceeded expectations, with activity in Germany growing at the fastest pace since October 2025 and France unexpectedly expanding at the quickest in more than two years.

“Manufacturing, spearheaded by Germany, is enjoying its best growth spell for over four years, spurred by rising AI and defense spending,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said Wednesday in a statement. “But service-sector growth is also perking up to signal a broad-based improvement in the economic growth story.” (…)

Boosts this month to euro-zone manufacturing and services order books hint at “sustained momentum heading into the fourth quarter,” Williamson said. But he noted that economic strength is driving consumer prices higher. (…)

“The resilience of economic growth amid the headwinds of geopolitical issues and rising prices will likely embolden the ECB to hike interest rates again before the end of the year.” (…)

More from S&P Global:

The picture for new orders at eurozone companies was similar to that for business activity, with growth recorded for the third month running in September. Here, the pace of expansion was the strongest since May 2022. Total new orders were supported by a further rise in new export business (which includes intra-eurozone trade).

New export orders increased for the second month running, after having decreased in each of the 53 months prior to August. The overall rise was centred on the manufacturing sector, while services new business from abroad continued to fall.

Meanwhile, staffing levels increased for the second successive month, but only modestly and at the same pace as in August.

Inflationary pressures intensified in September, with both input costs and output prices increasing at the sharpest rates in four months. The latest rise in input costs was faster than the average for the year-to-date, but remained softer than the recent peak seen in May. Accelerated cost inflation was registered across both the manufacturing and services sectors.

Similarly, output prices increased at sharper rates in both monitored sectors, as well as across Germany, France and the rest of the eurozone as a whole.

ING:

A closer look at the data, however, shows that the more dynamic activity stems mainly from services, which jumped significantly from 51.6 to 53.0. What is driving this jump in an environment of higher inflationary pressures remains a bit unclear. Germany, in particular, saw an increase in services activity, from 49.7 to 52.9, which almost looks too good to be true. (…)

All in all, today’s PMI readings are almost too good to be true. A eurozone economy that remains completely unharmed by an energy price shock and supply chain disruptions is a welcome surprise. Let’s hope it doesn’t turn out to be a mirage. At face value, however, today’s PMI readings make it more difficult for even the ECB’s most dovish policymakers to rule out another rate hike.

OECD sounds alarm on surging government bond yields Paris-based forecaster says governments’ debt interest bills are increasing pressure on public finances

(…)  The average 10-year benchmark bond yield of G7 countries has hit 4 per cent this year for the first time since 2008. The US war with Iran and ensuing surge in energy prices has fuelled a bond sell-off that reflects investor concerns about rising inflation.

The combination of higher borrowing costs and record bond issuance by governments across the rich world has propelled a rise in debt-servicing costs that is worrying policymakers. (…)

Across the OECD, debt interest costs topped $2tn, or 3 per cent of GDP, last year, and are expected to increase further. In France, the interest bill is expected to rise by a quarter this year, and it already exceeds defence spending in a string of countries. (…)

One route out of the debt squeeze is higher growth. The OECD said AI-related investment and trade is currently helping global growth weather the Gulf oil shock better than expected. 

The organisation added that G20 economies will expand by 3.1 per cent this year, 0.1 percentage points more than it forecast in June. The expansion should continue at a similar pace of 3 per cent in 2027, it added. 

Rising GDP will be led by stronger than expected growth in the US, where the economy is set to expand by 2.2 per cent this year and 2.1 per cent in 2027, boosted by the data centre construction boom. 

The OECD said GDP growth in nations including China, South Korea and Japan is being propelled by technology exports, with the global economy also cushioned by robust oil inventories. (…)

Inflation in G20 countries is set to rise to 4.1 per cent in 2026, up from 3.4 per cent last year, according to OECD forecasts.

It predicts price growth of 3.6 per cent in 2027 — an increase of 0.5 percentage points compared with its prior forecast. 

More than half of G20 countries currently have inflation that is above their central banks’ target, the organisation added.

Here’s What’s Happening to the Billions of Dollars of US Tariff Refunds

(…) The February ruling by the high court set in motion steps towards repaying an estimated $166 billion in revenue collected via duties Trump imposed after taking office in January last year.

The bulk of those payments has now been distributed, US Treasury data indicate. After three straight months of net declines in customs duties, flows turned positive again in August. A court filing shows that, as of Sept. 11, about $134.7 billion in refunds, including interest, had been paid out or approved for processing. (…)

A survey released Monday by the Federal Reserve Bank of Atlanta suggested companies are holding on to at least part of the cash. The 220 executives who shared their plans — in a broader survey of more than 1,100 taken last month — ticked multiple boxes in identifying their intentions. (…)

These one-time refunds flow in corporate P&Ls when received, positively impacting margins and profits.

Poll: Americans see rule of law declining in U.S.

A majority of Americans say the rule of law in the U.S. is weaker now than a decade ago, when Donald Trump was first elected president, according to a massive new survey of more than 23,000 U.S. adults.

78% of those responding to the survey by Gallup and the Charles F. Kettering Foundation for its Democracy for All Project say government officials must always follow laws and the Constitution.

But just 28% trust that political leaders will be held accountable if they don’t. (…)

The share of Americans who say the rule of law is weaker now than in 2016 is four times higher than the share who think it’s stronger (56% compared with 14%), while 29% say it’s unchanged. Democrats and independents were much likelier than Republicans to say it’s weaker. (…)

• 49% say they don’t agree with the idea that U.S. leaders are committed to having a strong democracy, up from 44% a year ago.
• 47% say they’re comfortable openly expressing opinions about government and laws, down from 52%.
• 56% say democracy is doing poorly, up from 51% the year before. That sense is largely being driven by rising concerns from Republicans and Republican-leaning independents, while Democrats and neutral independents already were highly critical.

• Trump’s last-ditch hunt for voter fraud

The Trump administration is deploying hundreds of federal investigators and attorneys to pursue President Trump’s long-running fixation — and test a broader Republican claim that tougher enforcement will uncover far more illegal voting.

“This initiative is a tier one priority,” a Justice Department official told reporters on Tuesday. “It’s a top priority for the attorney general and for the White House.” (…)

• DOJ has charged 24 immigrants this calendar year following the prioritization, according to agency press releases. The accused are a mixture of undocumented immigrations and legal residents.
• The number of prosecutions will “rise significantly each week going forward from now until the election,” the DOJ official said.

To support these investigations, which the HSI official called agent-time intensive, Homeland Security staff have shifted work time from other priorities.

HSI agents typically investigate smuggling, trafficking, financial fraud and sexual exploitation crimes.

Roughly 250 million adult U.S. citizens are eligible to vote in the 2026 midterm elections.

The next generation of American scientists is fading away While the Trump administration racks up ‘wins’ in its anti-woke crusade, the US is eroding its talent pipeline

A survey by academics at MIT, Harvard and Australia’s Monash University (…) across US run labs:

Of the junior scientists who responded, a third who once envisaged careers in academia had changed their minds by early 2025, with some PhD students and postdoctoral researchers even rethinking their plans to stay in the country.

The survey was published this summer as a non-peer-reviewed working paper from the National Bureau of Economic Research.

These are not the gripes of career bureaucrats bitter at slashed budgets, the survey’s authors point out, but “the stated intentions of the next generation — the scientists who would, in ordinary times, become the principal investigators of the future”.

These are clearly not ordinary times, and the biomedical research community is now bracing for another potential body blow: according to Politico, an imminent White House executive order will seek to install a political board to vet all National Institutes of Health grants, to weed out “woke” science.

As the Trump administration continues to lob ideological grenades at the nation’s premier centres of scientific research, it is no surprise that some future drug developers, device inventors, life savers and wealth creators are opting to walk away.  (…)

More than 900 replied from 134 institutions. While 66 per cent wanted to stay in academia six months before the survey, that fell to 44 per cent by March 2025. When it came to remaining in the US, just 72 per cent were keen, a drop from 93 per cent six months earlier.

The authors acknowledge there may be “recall bias”, and that intentions change, but describe young researchers as “the canary in the coal mine” for US scientific research. (…)

• Biotech is one area where the US can afford to let China flourish Drugmakers are picking through the Chinese biotech sector to find treatments and technologies to bring to overseas markets

(…) Drugmakers from around the world are picking through China’s biotech sector to find treatments and technologies they can bring to overseas markets. So far this year, companies have signed licensing deals worth $110bn, if all milestones are met, according to biopharma data gatherer Sleuth. That is roughly a $20bn increase on last year. (…)

There’s an obvious commercial logic to this. Medicines may be hatched in Chinese labs but the illnesses they treat, including cancer and autoimmune diseases, are global. (…)

Trump tends to take a hawkish view of capital flowing away from the US. He signed the Biosecurity Act into law at the end of last year, aiming to curb dealmaking with China’s biotech sector. Three similar pieces of legislation are wending their way through the system. WuXi AppTec was blacklisted for alleged military ties — a decision subsequently blocked by a US federal judge.

But trying to squash Chinese biotech is both impractical and unwise. For one, the industry is fairly self-sufficient; unlike tech, say, Washington cannot opt to withhold component parts such as chips. China has the entire chain sewn up, from brainpower and raw materials to speedy clinical trials — trial recruitment is up to five times quicker than in the West, says McKinsey — and manufacturing.

Capital, too, is in ample supply. Chinese companies can tap local and, via Hong Kong, international markets. There is likely to be state support too. Beijing, which last week released its five-year plan for the pharma industry, wants China to develop at least a quarter of the world’s first-in-class drugs.

One reason even trade-sceptical Americans should welcome the biotech trend is that they don’t have easy options if the flow of drugs is impeded. Cars, smartphones and Labubu dolls — or reasonable substitute products — can all be sourced at home. It is an altogether different proposition to withhold access to world-class treatments. 

AI remains an area of enormous tension between superpowers because in the race to superintelligence, it may be that there can only be one winner. In drugmaking, though, there can be many. If Chinese labs are coming up with innovative treatments and technologies, the rest of the world should cheer them on — and leave their protectionist tendencies for other sectors.

Indeed. But there goes the US bargaining (bullying) power. If you think rare earths are big bargaining chips, how about effective cancer treatments?

FYI

@Barchart