Good News, Bad News: Growth Pops, Price Pressures Perk—Doves, Not So Fast

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The August flash PMIs delivered the kind of “good news” that briefly rattles markets: U.S. private-sector growth accelerated, led by a decisive manufacturing rebound, while services remained firmly expansionary—an upside surprise that initially pushed equities lower on fears Chair Powell will simply reaffirm the Fed’s patient stance; support held, but the signal is clear that momentum into Q3 is stronger than consensus expected.

Start with the headlines. Manufacturing surged to 53.3, smashing the 49.7 consensus and July’s 49.8, its highest since May 2022 and the first clean break into expansion in months. Services printed 55.4, above the 54.2 consensus and only a shade softer than July’s 55.7, keeping the Composite Output Index at 55.4, an eight-month high. In plain English: activity is broad-based and accelerating.

Under the surface, the growth impulse came from both demand and supply-side normalization. In factories, output jumped to a 39-month high, supported by the largest rise in new orders since February 2024 and the biggest gain in goods export orders in 15 months—a notable shift after a long export lull. Services activity moderated fractionally from a year-to-date high, but new business growth actually gathered pace to the strongest since December, aided by a modest return to growth in services exports. The upshot: domestic demand remains the engine, and external demand is no longer a pure headwind.

Capacity indicators confirm the turn. Backlogs of work rose at the fastest pace since May 2022, signaling demand is outpacing available capacity at the margin. Firms responded by hiring: employment rose for a sixth straight month, with service-sector hiring at a seven-month high and factory payrolls posting their largest gain since March 2022. Business confidence ticked higher, though sentiment is still softer than early-year levels amid policy and tariff uncertainty—a reminder that executives are optimistic, not euphoric.

Inventories and supply chains tell an important story about strategy and risk management. Manufacturers reported record stock building of finished goods (a survey high back to 2007) and the second-largest rise in input inventories in over three years. Some of this is classic “get ready for demand,” but the report explicitly notes safety-stock accumulation tied to tariff concerns and potential supply disruptions. Supplier delivery times continued to improve (still a mild drag in the PMI arithmetic), yet firms are clearly choosing resilience over just-in-time minimalism. If demand holds, these inventories will lubricate growth; if it cools, they will weigh on production later—an important swing factor for Q4.

Inflation is where the nuance—and the Fed angst—resides. Input costs rose at the steepest pace since May (second-largest since January 2023), and the survey is unambiguous on causality: tariffs were widely cited as the principal driver of higher costs across both manufacturing and services. Companies passed more of those costs through, lifting average selling prices at the fastest rate since August 2022. The split by sector matters: goods output-price inflation cooled slightly for a second month (still high by three-year standards), while services price inflation was the sharpest since August 2022. That’s the stickier profile central bankers worry about—services-led inflation that is less sensitive to goods disinflation.

Trade was a mild positive on the goods side and stable-to-softer for services. The largest rise in goods exports in 15 months aligns with the global PMI pattern of a tentative factory recovery, while services exports only edged back to growth, consistent with uneven foreign demand and a strong U.S. services base relying more on domestic customers. As for supply, improving delivery times and rising inventories suggest fewer immediate bottlenecks, but companies’ precautionary stockpiling implies they’re not taking benign logistics for granted.

How should markets—and the Fed—read this? S&P Global’s economist pegs the PMI configuration to ~2.5% annualized GDP growth in Q3, well above the ~1.3% average pace of H1. Historically, the combination of faster activity, firm hiring, rising backlogs, and quicker price growth nudges policy into “hiking rather than cutting territory,” at least by the survey’s mapping to past FOMC behavior. That doesn’t mean hikes are imminent—Powell can still emphasize data dependence and the need for more information—but it does make near-term cuts harder to justify, which is exactly why the “good-news-is-bad-news” trade showed up at the open.

Notable sub-category moves relative to July: manufacturing output and new orders accelerated sharply; factory employment rebounded; services new business strengthened even as services activity ticked a touch lower; backlogs rose briskly in both sectors; input prices quickened broadly, and prices charged accelerated more in services than in goods. Each of those is consistent with an economy re-accelerating into late summer while tariff-linked cost pass-through keeps inflation from slipping complacently toward 2%.

Bottom line: The U.S. is not just avoiding a slowdown—it’s leaning into a late-cycle re-acceleration, with factories re-engaging, services still humming, and firms hiring to keep up. The inflation mix is less comforting: costs are rising and pricing power—especially in services—has firmed, a combination that argues for patience, not pivot from the Fed. For investors, that explains the initial wobble and the subsequent hold of support: stronger growth is investable, but it likely postpones rate-cut fantasies and keeps the focus on margins, inventory strategy, and services-side inflation in the months ahead.