WASHINGTON (Reuters) – U.S. manufacturing activity rose to its highest level in nearly 2-1/2 years in December likely as spiraling new COVID-19 infections pulled demand away from services towards goods.

FILE PHOTO: A worker pours hot metal at the Kirsh Foundry in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel

The Institute for Supply Management (ISM) said on Tuesday its index of national factory activity rebounded to a reading of 60.7 last month. That was the highest level since August 2018 and followed 57.5 in November.

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 slipping to 56.6 in December.

But some of the surprise rebound in the ISM index was due to an increase in the survey’s measure of supplier deliveries to a reading of 67.6 last month from 61.7 in November.

A lengthening in suppliers’ delivery times is normally associated with a strong economy and increased customer demand, which would be a positive contribution. But in this case slower supplier deliveries also likely indicate supply shortages related to the coronavirus pandemic.

Nevertheless, demand for manufactured goods has been strong as an onslaught of new coronavirus cases has led to fresh business restrictions across the United States, largely impacting the vast services sector.

A large section of the population continues to work and take classes at home, fueling a rush for electronics, home improvement products and other goods like exercise equipment.

Despite strong demand, manufacturing output is still about 3.8% below its pre-pandemic level, according to the Federal Reserve. Still, the sector likely helped to keep the economy afloat in the fourth quarter as the virus and depleted government pandemic money took a bite out of consumer spending.

Growth estimates for the October-December quarter are around a 5% annualized rate. The economic grew at a record 33.4% pace in the third quarter, boosted by more than $3 trillion in fiscal stimulus. That followed a 31.4% rate of contraction in the second quarter, the deepest since the government started keeping records in 1947.

The ISM’s forward-looking new orders sub-index rose to a reading of 67.9 last month from 65.1 in November. Strong order growth boosted manufacturing employment, which had contracted in November. The ISM’s manufacturing employment gauge rebounded to 51.5 from a reading of 48.4 in November.

But bottlenecks in the supply chain are driving up costs for manufacturers. The survey’s prices paid index jumped to a reading of 77.6 last month, the highest since May 2018, from 65.4 in November. That raises the risk of higher inflation this year, though high unemployment could limit price pressures.

The labor market has lost steam in tandem with the economy since job growth peaked at a record 4.781 million in June.

According to an early Reuters survey of economists, nonfarm payrolls probably increased by 100,000 jobs last month after rising 245,000 in November. That would mean the economy recouped about 12.5 million the 22.2 million jobs lost in March and April. The government is scheduled to publish December’s employment report on Friday.

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