The numbers: American manufacturers grew in February at the fastest pace since the onset of the pandemic and business leaders are increasingly optimistic about the economy, a new survey showed.
The Institute for Supply Management said its manufacturing index rose to 60.8% last month from 58.7% in January and matched a two-year high.
Readings over 50% indicate growth, and anything over 55% is considered exceptional.
The increase surpassed Wall Street expectations. Economists surveyed by Dow Jones and The Wall Street Journal had forecast the ISM index to total 58.9%.
The biggest worry? A shortage of certain key materials such as lumber and semiconductors are pushing prices higher and in some cases constraining production. That could lead to an increase in inflation and even hinder the recovery.
“Prices are rising so rapidly that many are wondering if [the situation] is sustainable,” said a senior executive at a maker of wood products.
What happened: New orders, production and employment all improved last month.
The index for new orders advanced 3.7 points to 64.8% while the production gauge increased 2.5 points to 63.2%.
“We have seen our new-order log increase by 40% over the last two months,” said an executive at a producer of primary metals that are critical for many manufactured goods. “We are overloaded with orders and do not have the personnel to get product out the door on schedule.”
The employment barometer also climbed for the third month in a row — to 54.4% from 52.6% — despite higher absenteeism and a dearth of skilled labor.
The increase in employment bodes well for the U.S. jobs report for February. Wall Street predicts the number of new jobs created will rise to 240,000 from a meager 49,000 in January.
Sixteen of the 18 industries tracked by ISM expanded in February. The ISM index is compiled from a poll of senior executives who are asked whether business is getting better or worse. The gauge tends to rise or fall in tandem with the health of the economy.
Big picture: Manufacturers have led the economic recovery and production has returned close to normal.
Businesses are even more optimistic about the next year. Orders are increasing in anticipation of strong sales as the vaccines do their work and more government stimulus is pumped into the economy. The Biden administration is on the verge of passing another federal aid package that could total close to $2 trillion.
The only thin that might slow the recovery are ongoing supply disruptions, but they should ease once the pandemic fades.
What they are saying? “The recovery in the sector remains red-hot,” said Michael Pearce, senior U.S. economist at Capital Economics.