U.S. manufacturing activity unexpectedly slowed in March as tight supply chains continued to drive input prices higher, but factories boosted hiring, allowing them to reduce the backlog of unfinished work.
The Institute for Supply Management (ISM) said on Friday that its index of national factory activity fell to a reading of 57.1 last month from 58.6 in February.
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 rising to 59.0.
The slowdown in manufacturing also reflects a shift in spending back to services amid a significant decline in COVID-19 infections, which has resulted in the rolling back of restrictions across the country. Government data on Thursday showed consumer spending on services increasing by the most in seven months in February, while goods outlays declined.
The ISM survey's forward-looking new orders sub-index fell to 53.8 last month from 61.7 in February. Goods spending surged as the pandemic curbed demand for services like travel. Even as spending reverts back to services, manufacturing should remain underpinned by very low inventories. Customer inventories have remained extremely lean for more than 60 months.
Russia's war against Ukraine, which has boosted prices of oil, wheat and other commodities, likely slowed the improvement in the global supply chains.
The ISM survey's measure of supplier deliveries dipped to a still-high reading of 65.4 from 66.1 in February. A reading above 50% indicates slower deliveries to factories.
That kept inflation at the factory gate very hot. The survey's measure of prices paid by manufacturers increased to a reading of 87.1 from 75.6 in February.
The Federal Reserve last month raised its policy interest rate by 25 basis points, the first hike in more than three years, and adopted a hawkish posture as it fights inflation.
The survey's measure of factory employment increased to a reading of 56.3 in March from 52.9 in February. With more workers on the floor, a gauge of unfinished work at factories fell to 60.0 from a reading of 65.0 in February.
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