US factory activity slows in February but supply bottlenecks push up prices - IHS Markit

WASHINGTON, Feb 19 (Reuters) - U.S. factory activity slowed in early February likely as a global semiconductor chip shortage hurt production at automobile plants, while prices of inputs and manufactured goods soared, which could heighten fears of strong inflation growth this year.

Data firm IHS Markit said on Friday its flash U.S. manufacturing PMI dropped to 58.5 in the first half of this month from a final reading of 59.2 in January. Extreme weather in large parts of the United States was also blamed.

The data was in line with economists’ forecasts, with a reading above 50 indicating growth in manufacturing, which accounts for 11.9% of the U.S. economy. Manufacturing has powered ahead as the COVID-19 pandemic left Americans grounded at home, shifting demand to household goods from services like airline travel and hotel accommodation.

But the coronavirus has disrupted labor at both suppliers and manufacturers, leading to shortages of goods critical to the production processes. Motor vehicle manufacturers have been hit by a semiconductor chip shortage, leading some to temporarily close assembly plants this month.

General Motors announced it would take down production entirely at its Fairfax plant in Kansas City during the week of Feb. 8. Ford Motor has reduced shifts at its Dearborn truck plant and Kansas City assembly plant.

The supply chain bottlenecks, which are widespread across the manufacturing sector as well as the services industry, have led to higher prices for inputs, including raw materials.

The IHS Markit survey’s measure of prices paid by manufacturers shot up to its highest level since April 2011. Manufacturers are also passing on the higher costs to consumers. The survey’s gauge of prices received by factories surged to its highest level since July 2008.

Inflation is being closely watched amid concerns from some quarters that President Joe Biden’s proposed $1.9 trillion COVID-19 rescue package could cause the economy to overheat.

Though price pressures are expected to rise in the coming months as last year’s low readings drop out of the calculation, there is no consensus among economists whether higher inflation would stick beyond the so-called base effects.

Federal Reserve Chair Jerome Powell said last week while he expected inflation to be boosted by base effects and pent-up demand when the economy fully reopens, that would be transitory, citing three decades of lower and stable prices.

The inflation outlook will likely hinge on the labor market, which is currently experiencing considerable slack, with at least 18.3 million Americans on unemployment benefits.

While the manufacturing expansion cooled, activity in the services industry gained momentum this month. The IHS Markit’s flash services sector PMI edged up to 58.9 from a final reading of 58.3 in January.

The highest reading since March 2015 came as new COVID-19 infections and hospitalization rates dropped, allowing authorities to roll back some restrictions on restaurants and other consumer-facing businesses.

The services sector, which accounts for more than two-thirds of U.S. economic activity, has borne the brunt of the pandemic.

Improving conditions in the services sector helped to support overall business activity this month.

The survey’s flash composite PMI Output Index, which tracks the manufacturing and services sectors, inched up to 58.8 from a final a reading of 58.7 in January. (Reporting By Lucia Mutikani Editing by Chizu Nomiyama)