The September flash purchasing managers survey from S&P Global put the composite output index at 58.4, up from 56.0 in August and the strongest reading in more than five years. Services came in at 58.7 and manufacturing at 57.0, the latter reviving to its quickest output growth since April 2022. Hiring accelerated to a pace not seen since June 2022.

On any ordinary reading that is a good month. The bond market treated it as a bad one, and the reason sits in the same release: input costs jumped at the steepest rate in four years, driven by energy and transport.

Why a diffusion index moves markets

A purchasing managers index is not a measure of how much the economy produced. It asks purchasing managers whether conditions improved, worsened or stayed the same, and reports the share answering improved, adjusted so that 50 means no change. A reading of 58.4 says a large majority of firms saw activity rise, and says nothing directly about by how much.

That construction makes it fast rather than precise, which is exactly why markets watch it. The survey lands weeks before the official output and inflation statistics covering the same period, so it moves expectations first. Economists at JPMorgan read the September figures as consistent with an annualised growth rate near 5%, which would be roughly double the pace the Federal Reserve is projecting for this year.

The prices component is the part that reaches policy. Input costs at a four-year high, with selling prices rising more slowly because competition is absorbing part of the increase, describes margin compression now and consumer price pressure later.

Strong growth is not a neutral fact for a tightening Fed

Whitmore's Watchlist:
> XLI (Industrial Select Sector SPDR Fund): Broad industrial exposure, the sector this survey describes most directly.
> IYT (iShares U.S. Transportation ETF): Freight and logistics, where the transport cost pressure in the release actually lands.
> PAVE (Global X U.S. Infrastructure Development ETF): Construction materials and equipment, geared to the capital spending side of the same expansion.

The Federal Reserve raised its target range to 3.75% to 4% on September 16 and published projections showing a median policy rate of 4.1% at the end of both 2026 and 2027. Those projections assume growth around 2.3% this year. A survey pointing at 5% does not fit inside that framework.

This is the uncomfortable position the economy has put the committee in. When growth is weak, an inflation problem eventually solves itself as demand falls away. When growth is accelerating and input costs are rising at the same time, the central bank has no such help, and the argument for further tightening strengthens with every strong data point.

That is why good economic news has been landing as higher yields rather than as higher share prices. The thirty-year Treasury reached 5.63% this week, its highest since 2002, and the ten-year sits at 5.26%. Both rose through a week in which the reported inflation data was softer than expected.

Where the survey and the official numbers might diverge

Two cautions are worth holding. Purchasing managers surveys have overstated the pace of expansion before, particularly when respondents are reporting price increases they intend to pass on rather than volumes they have actually shipped. And a diffusion index at 58 does not distinguish between a firm whose orders rose 1% and one whose orders doubled.

The employment reading is the cross-check most worth watching. Hiring at the fastest rate since mid-2022 is a claim that the official payroll data will either confirm or contradict within weeks, and a labour market accelerating into a tightening cycle is a different economy from the one most forecasts have assumed.

For positioning, the honest summary is that the growth data and the inflation data are now pointing in opposite directions, and the market is choosing to believe the growth. Cyclical exposure benefits from that in the near term and suffers if the response to it is another rate increase. Both can be true in sequence.

Whitmore's Take: A five-year high in business activity alongside a four-year high in input costs is the combination that keeps a central bank tightening. Worth treating strong growth data as a rates event this year rather than as an equity event.

Written by Daniel Whitmore
Millionaire Insiders