PMI composite rises in-line with forecast

September PMITM data signalled a solid upturn in U.S. service sector business activity, albeit one that was slightly slower than August's recent high. The expansion was largely driven by a faster rise in new business. Quicker growth in new sales was supported by another strong increase in foreign client demand. As a result, employment growth remained historically marked, with firms mentioning strains on capacity. Business confidence, however, sank to a four-month low amid concerns regarding the coronavirus disease 2019 (COVID-19) pandemic.

Input costs rose at a strong rate, but one that was outpaced by the increase in selling prices, as firms passed on higher costs to clients.  

The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 54.6 in September, down slightly from 55.0 in August, but matching the earlier released 'flash' estimate. The solid rise in business activity was commonly linked to stronger demand conditions. The rate of growth was the second-fastest since March 2019 and solid overall despite softening from that seen in August

The rate of new business growth accelerated in September, as the respective seasonally adjusted index moved further away from April's nadir. The strong expansion was the sharpest since March 2019, as total new sales were boosted by strengthening customer demand. The upturn was aided by a fourth successive monthly rise in new export orders. Moreover, the expansion in foreign client demand was the second-strongest since data collection for the series began six years ago.

In line with greater new business inflows, firms increased their workforce numbers in September. The rate of job creation was strong overall and the second-quickest since February 2019, as many firms stated that insufficient capacity to process new orders had driven hiring. 

At the same time, backlogs of work rose for the third month running and at a solid pace.  

Meanwhile, input costs increased at a sharp, albeit softer pace in September. Service providers noted that higher input prices were due to greater wage and equipment costs, with many highlighting the uptick in PPE prices. The rate of inflation was faster than the series trend and among the quickest since November 2018. 

Reflecting higher input prices and sharper new business growth, firms were able to pass on cost burdens to their customers through greater output charges. Selling prices rose at the fastest rate since September 2018 and outpaced the rise in cost burdens, as firms took advantage of stronger demand conditions. 

Nevertheless, business expectations regarding the outlook for output over the coming 12 months slumped at the end of the third quarter. Although optimistic of a rise in business activity, hesitancy among service providers reportedly stemmed from concerns relating to the ongoing COVID-19 pandemic and the impact on future demand.