US Business Growth Hits Best Stretch Since Early 2015 — With One Catch

U.S. businesses just posted their best growth spell since early 2015, excluding the pandemic — and the same surveys that confirm the boom also flag inflation climbing well past the Federal Reserve's comfort zone.

A pair of S&P surveys released on the verge of the holiday shopping season showed a surprisingly strong U.S. economy holding its vigor into the fourth quarter. Companies hired more workers to keep up with rising customer demand, S&P Global found.

"The U.S. economy continues to boom at the start of the fourth quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "However, cost pressures remain a key concern."

That's the one big problem in an otherwise strong report: high inflation and climbing prices, which companies are now pushing onto their customers.

What's driving the boom?

Demand came from nearly every direction. U.S. households spent steadily, businesses invested, and export orders picked up, according to the S&P data.

Two forces stand out:

• Steady consumer spending kept cash registers moving into the holiday season.
• Massive investment in artificial intelligence added a powerful lift to business activity.

A survey of top business executives pointed to "the best growth spell for U.S. businesses since early 2015" once the COVID-19 pandemic is set aside, Williamson said.

Strong demand is usually welcome news. This time, it's squeezing the cost of supplies.

Why are prices still climbing?

The demand surge is colliding with critical shortages of some raw materials. The ongoing conflict with Iran and high oil prices rank among the major sources of inflation, the surveys showed.

Businesses are responding the way textbooks predict: passing higher supply costs on to customers. And they have more leverage to do it, because demand keeps rising.

If that dynamic holds, Williamson warned, "consumer-price inflation is likely to rise further above the Fed's target in the coming months."

The numbers back him up. Inflation has run above 3.5% over the past year — well above the Fed's 2% target.

What is the Fed doing about it?

The Federal Reserve raised a key U.S. interest rate in September to contain inflation, and the central bank is expected to keep pushing borrowing costs higher in the months ahead.

That sets up the classic trade-off. Higher rates might tamp down inflation, but they could also slow the economy that's currently running hot.

For now, at least, businesses aren't bracing for a demand slump. Employment increased in October at the second-fastest pace in four years, S&P said.

What happens next?

The fourth quarter opens with an economy firing on demand, hiring and exports — and a price tag attached. Watch whether the Fed's next rate moves cool inflation before they cool the boom.