WASHINGTON, D.C.: U.S. businesses saw a sharp acceleration in demand in September, pushing activity to its strongest level in more than five years while also straining supply chains and driving up costs.

S&P Global's flash U.S. Composite PMI Output Index rose to 58.4 in September from 56.0 in August, its highest reading since July 2021. A reading above 50 signals expansion in the private sector.

Growth strengthened in both manufacturing and services, with S&P Global saying the latest PMI was consistent with the U.S. economy expanding at an annualized rate of about five percent. The Atlanta Federal Reserve's gross domestic product estimate is running at 5.1 percent. The economy grew at a 1.5 percent pace in the April-June quarter.

"Business is clearly booming now in both manufacturing and services," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "However, this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded."

The supply constraints have largely resulted from the U.S.-Israeli war with Iran, now in its seventh month.

New orders received by businesses climbed to 58.2 from 55.2 in August, reaching their highest level since March 2022. The increase was recorded across both manufacturing and services.

Incomplete orders, an indicator of capacity utilization and future business growth, rose to their highest level since May 2022. Companies increased hiring to clear the growing backlog, although S&P Global said there were also growing reports of difficulty finding suitable workers.

The pressure on capacity was accompanied by a steep increase in costs. The survey's measure of prices paid by businesses for inputs jumped to 66.4 from 59.9 in August, its highest reading since October 2022. Both manufacturing and services companies reported higher input prices.

S&P Global said high raw material costs in manufacturing were frequently linked to shortages, while suppliers' delivery times lengthened considerably. Supply chain delays were the most widespread since July 2022.

"While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook," said Williamson.

The findings follow comments from Chicago Fed President Austan Goolsbee on September 21 that supply shocks were proving more persistent and that there was evidence strong demand was adding to inflation pressures.

Further cost increases are possible as record-high diesel prices drive up transportation costs. The Federal Reserve last week increased its benchmark overnight interest rate by 25 basis points to a range of 3.75 percent to 4.00 percent and signaled further increases in the coming months.