By Lucia Mutikani
WASHINGTON (Reuters) – U.S. factory activity powered ahead in early April, but manufacturers increasingly struggled to source raw materials and other inputs as a reopening economy leads to a boom in domestic demand.
Data firm IHS Markit said on Friday its flash U.S. manufacturing PMI increased to 60.6 in the first half of this month. That was the highest reading since the series started in May 2007 and followed a final reading of 59.1 in March.
Economists polled by Reuters had forecast the index rising to 60.5 in early April. A reading above 50 indicates growth in manufacturing, which accounts for 11.9% of the U.S. economy.
More than half of American adults have had at least one vaccine dose, according to the U.S. Centers for Disease Control and Prevention (CDC). A third of U.S. adults are fully vaccinated, as well as 26% of the population overall.
That, together with the White House’s $1.9 trillion COVID-19 pandemic rescue package, has allowed for broader economic re-engagement, unleashing pent-up demand.
“The U.S. economy is enjoying a strong start to the second quarter, firing on all cylinders as loosening virus restrictions, an impressive vaccine roll-out, a brighter outlook and stimulus measures all helped boost demand,” said Chris Williamson, chief business economist at IHS Markit.
But the strong demand is pushing against supply constraints. The pandemic, now in its second year, has disrupted labor at factories and their suppliers, causing shortages that are boosting prices of raw materials and other inputs.
The IHS Markit survey’s measure of prices paid by manufacturers jumped to the highest level since July 2008. It attributed the higher input prices to “severe supplier shortages and marked rises in transportation fees.”
The continued rise in input costs is one of many factors expected to drive inflation above the Federal Reserve’s 2% inflation target this year. Fed Chair Jerome Powell has expressed confidence that the supply chains will adapt and become more efficient, and prevent prices from remaining higher for a sustained period.
The raw material squeeze is most evident in the automobile industry, where a global semiconductor shortage has forced production cuts at motor vehicle assembly plants. According to IHS Market supply shortages were causing backlogs of uncompleted work “of a magnitude not surpassed for over seven years.”
The IHS survey’s new orders measure increased and as a result, factories boosted hiring.
The improvement in activity also spilled over to the services sector, which has been disproportionately impacted by the pandemic. The IHS Markit flash services sector PMI jumped to 63.1, the highest since the series started in October 2009, from a final reading of 60.4.
It said growth in the services sector, which accounts for more than two-thirds of U.S. economic activity, was driven by “stronger client demand and the reopening of many businesses amid the easing of restrictions.”
The strength in manufacturing and the services industries boosted overall business activity. The survey’s flash composite PMI output index, which tracks the manufacturing and services sectors, rebounded to 62.2. That was also the highest reading since the series started in October 2009 and followed 59.7 in March.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)