U.S. manufacturing sector at three-year high, cost pressures mounting: ISM

WASHINGTON (Reuters) - U.S. manufacturing activity increased to a three-year high in February amid an acceleration in new orders, but factories continued to face higher costs for raw materials and other inputs as the pandemic drags on.

The Institute for Supply Management (ISM) said on Monday its index of national factory activity rebounded to a reading of 60.8 last month from 58.7 in January. That was the highest level since February 2018.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists polled by Reuters had forecast the index edging up to 58.9 in February.

The increase was despite a global semiconductor chip shortage, which has hurt production at automobile plants.

The survey added to solid January data on consumer spending, building permits, factory production and home sales in suggesting that the economy got off to a strong start in the first quarter, thanks to nearly $900 billion in additional COVID-19 relief money from the government and a drop in new coronavirus infections and hospitalizations.

But the year-long pandemic has gummed up the supply chain, boosting production costs for manufacturers. The survey’s measure of prices paid by manufacturers jumped to a reading of 86.0, the highest since July 2008, from 82.1 in January.

This follows data last month showing a surge in consumers’ near-term inflation expectations, and fits in with views that inflation will accelerate in the months ahead. Economists are, however, split on whether the anticipated spike in price pressures will be transitory or not.

U.S. Treasury yields have risen, with investors betting that extremely accommodative monetary and fiscal policy will boost inflation. Federal Reserve Chair Jerome Powell has played down these fears, citing three decades of lower and stable prices.

There is also ample capacity in the labor market, with at least 19 million people on unemployment benefits. But Americans grounded at home by COVID-19 have accumulated excess savings, which can provide to a powerful tailwind to spending.

Manufacturing has been driven by strong demand for goods, like electronics and furniture, as 23.2% of the labor force works from home because of the virus. Demand could, however, shift back to services in the summer as more Americans get vaccinated, and slow manufacturing activity from current levels.

The ISM’s forward-looking new orders sub-index increased to a reading of 64.8 last month from 61.1 in January. Factories also received more export orders and order backlogs swelled. As a result, factories stepped up hiring last month.

The survey’s manufacturing employment gauge rose to 54.4, the highest reading since March 2019, from 52.6 in January.

That offers cautious optimism that employment growth picked up last month after nonfarm payrolls increased by only 49,000 jobs in January. The economy has recovered 12.3 million of the 22.2 million jobs lost during the pandemic.