S&P Global Says Business Activity Growth Slows But Remains ‘Robust'

U.S. business activity growth slowed for the second consecutive month in September, with S&P Global's Flash Composite PMI dipping to 53.6, though the reading remains elevated and Q3 saw robust expansion across manufacturing and services. This deceleration is balanced by stronger-than-expected August retail sales, which rose 0.6% month-over-month, and improved small business optimism, with the NFIB index climbing to 100.8. Sentiment is partly driven by anticipated lower interest rates, despite persistent concerns over labor shortages and the political environment.

Analysis

U.S. business activity growth moderated for a second consecutive month in September, with the S&P Global Flash Composite PMI declining to 53.6 from 54.6 in August. Despite this slowdown in both manufacturing and services, the overall rate of growth remains robust and at an elevated level. The third quarter as a whole registered the strongest average monthly expansion since the fourth quarter of 2024. A notable divergence exists between the current deceleration and future outlook, as companies' expectations for output in the year ahead climbed to a four-month high. This improved sentiment is partly driven by the anticipated beneficial impact of lower interest rates, though it remains tempered by concerns over the political environment and tariffs. Supporting the theme of underlying economic resilience, August retail sales posted a stronger-than-expected gain of 0.6% from the previous month, while the NFIB Small Business Optimism Index also rose, with more owners anticipating higher sales. However, persistent labor shortages remain a primary concern for small businesses, representing a key constraint on potential growth.

Key Decisions for Investors

• Given that the slowdown in the PMI is from a high base and accompanied by resilient consumer spending and rising forward-looking sentiment, investors should be cautious of overreacting to the headline deceleration and instead focus on the absolute strength of the economic data.
• The explicit link between improved business sentiment and expectations of lower interest rates makes future Federal Reserve communications and incoming inflation data critical catalysts; any hawkish shift could quickly reverse the positive outlook.
• Consider overweighting exposure to U.S. consumer-focused sectors that benefit from strong retail sales, while remaining vigilant on companies highly exposed to labor cost pressures or international trade, as labor shortages and tariff concerns persist as key risks.