Does U.S. Manufacturing Hitting 3-Year Highs Confirm Rising Inflation?

Manufacturers are doing well these days, but they’re paying the price… and soon, so will we.

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.

On Monday, the Institute for Supply Management released manufacturing data showing 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. Rather surprising numbers considering the global semiconductor chip shortage which delivered quite the blow to production at automobile plants.

For context on these numbers, 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 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 certainly explains why investors have been so skittish about inflation and have demanded higher interest rates over the past few weeks. While the headline paints and promising picture for domestic manufacturing, the report itself suggests something much bleaker about the U.S. manufacturing sector right now — businesses simply cannot keep up with this recovery. And notable pressures exist in both the pricing and delivery of goods right now.

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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