U.S. Manufacturing Soars, So Do Costs, Hinting at Inflation

Manufacturers are doing well these days, but they’re paying the price.

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.

The jump in prices paid explains why investors are skittish about inflation and have demanded higher interest rates over the past few weeks. With the next relief package in the Senate, we’ll see more money chasing goods in the months ahead, which could push prices higher and drive inflation.

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