Economic activity in the U.S. private sector grew at a slightly faster pace than anticipated in September, marking a stark contrast between the healthy services sector and the struggling manufacturing industry, according to the flash estimates from the Purchasing Managers' Index (PMI) report released by S&P Global on Monday.

Despite better-than-expected readings for both the composite and services PMIs, two concerning trends emerged from September's surveys.

First, the manufacturing sector' deepened contraction's contraction deepened, with output levels hitting their lowest level since December 2023. Second, inflationary pressures resurfaced, notably in the same month the Federal Reserve announced a 50-basis-point interest rate cut, with signals of further cuts ahead.

September Flash PMI Reports: Key Highlights

  • Composite PMI: Eased from 54.6 in August to 54.4 but slightly outpaced the forecast of 54.3, as tracked by TradingEconomics.
  • Services PMI: Slowed from 55.7 to 55.4, still above the expected 55.3, signaling ongoing expansion.
  • Manufacturing PMI: Contracted more sharply, falling from 47.9 to 47, missing the expected improvement to 48.9.
  • Manufacturing orders shrunk and business expectations for the year ahead hit a two-year low, primarily due to rising political uncertainty ahead of the upcoming presidential election. This uncertainty is leading companies to freeze hiring and cut jobs, with employment levels falling for the second consecutive month.
  • Manufacturing payrolls were cut at the sharpest pace since June 2020, with factory job reductions at their steepest since January 2010 as firms grapple with weak demand.
  • September saw a marked a worrisome increase in average prices for goods and services, with the fastest rise since March. This was the first acceleration in selling price inflation in four months, intensifying concerns about the new Federal Reserve's monetary policy easing stance.
Economist Insights

"The early survey indicators for September point to an economy that continues to grow at a solid pace [...]. A reacceleration of inflation is meanwhile also signalled, suggesting the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The survey aligns with a "healthy" third-quarter GDP growth estimate of 2.2% annualized, Williamson said, but emphasized the economy's overreliance on the services sector and a drop in business confidence tied to political instability.

Regarding the price pressures increase, he advised the Fed to move cautiously in implementing further rate cuts.

Market Reactions

  • U.S. Dollar Index (DXY): The dollar strengthened, with the Invesco DB USD Index Bullish Fund ETF (UUP  ) trading 0.3% higher in early New York trading.
  • Treasury Yields: Both the 10-year yield and 30-year yield climbed by 5 basis points, sending the iShares 20+ Year Treasury Bond ETF (TLT  ) down by 0.8%.
  • Stock Market: The S&P 500 - tracked by the SPDR S&P 500 ETF Trust (SPY  ) - edged up 0.4%, staying within striking distance of last week's all-time highs.