Manufacturing surges at fastest pace in three years

U.S. manufacturing expanded in February at the fastest pace in three years with the arrival of a surge in new orders.

At the same time, a gauge of materials costs accelerated the most since 2008 as supply shortages continued to challenge the industry.

A gauge of factory activity increased to 60.8 from 58.7 a month earlier, according to Institute for Supply Management data released Monday. It was the strongest performance since February 2018. Readings above 50 indicate expansion, and the figure exceeded the 58.9 median estimate in a Bloomberg survey of economists.

The survey found optimism increasing with five positive comments for every cautious comment, up from a 3-to-1 ratio in the January survey.

Manufacturers are benefiting from a shift in spending, with Americans spending money on homes and other projects rather than going out to restaurants or risking shopping indoors, said Timothy Fiore, chairman of the institute’s manufacturing survey panel.

“They are buying all kinds of items that the manufacturing economy builds,” he said. “As long as parts of the services sector are shut down, Americans are spending on hard goods.

At a time when household and business demand is off to a solid start for the year amid lean inventories, producers are struggling with rising costs for raw materials, labor force disruptions and higher shipping rates.

Orders, production and factory employment measures all expanded at faster paces last month, highlighting resilience in manufacturing that’s helping power the economy. At the same time, a measure of unfilled orders surged to the highest level in nearly 17 years ,while another gauge showed delivery times were the second-longest since 1979.

“Labor-market difficulties at panelists’ companies and their suppliers continued to restrict manufacturing-economy expansion and will remain the primary headwind to production growth until employment levels and factory operations can return to normal across the entire supply chain,” Fiore said.

The group’s gauge of order backlogs advanced to 64 last month, the highest since April 2004 and its index of supplier deliveries jumped almost 4 points to 72.

Last week, President Joe Biden signed an executive order intended to boost manufacturing jobs by strengthening U.S. supply chains for advanced batteries, pharmaceuticals, critical minerals and semiconductors.

A widening global shortage of semiconductors for auto parts is forcing major auto companies to halt or slow vehicle production just as they were recovering from pandemic-related factory shutdowns.

“The comments in the report also make it crystal clear that these shortages go well beyond just semiconductors, with firms in every sector reporting shortages and problems with suppliers keeping up with demand,” said Michael Pearce, a senior economist at Capital Economics.

The disruption in supplies is largely tied to the pandemic as more people began working from home, spurring sharp increases in demand for semiconductors for computers and other electronics.

Other analysts said they believed manufacturing would be able to overcome the supply chain issues.

“Strong consumer demand for goods, increasing business investment, a roaring housing market and global economic growth are all supporting U.S. manufacturing,” said PNC Chief Economist Gus Faucher.

Sixteen of 18 manufacturing industries reported growth in February, led by textiles, electrical equipment and appliances, and primary metals.

The index of production rose 2.5 points in February to 63.2, while the new orders’ gauge climbed 3.7 points to 64.8.

To help meet demand, factories are adding to headcounts, the report showed. An index of manufacturing employment increased to the highest level in almost two years.

A survey of economists by the National Association for Business Economics showed increased optimism about the economy’s prospects this year. Respondents raised their growth estimates for each quarter this year, according to the association report issued Monday.

Economists also forecast lower unemployment rates each quarter compared with their December projections.