SUMMARY 2-Manufacturing activity in the United States is picking up speed; Supply disruptions loom due to Russian-Ukrainian conflict

(Adds details, analyst comment, updates markets)

* The ISM manufacturing index rises to 58.6 in February

* The new orders index stands at 61.7; jobs gauge drops to 52.9

* Construction spending rises 1.3% in December

By Lucia Mutikani

WASHINGTON, March 1 (Reuters) – U.S. manufacturing activity picked up more than expected in February as COVID-19 infections waned, though factory hiring slowed, helping to keep production chains going. blocked supplies and high input prices.

The Institute for Supply Management (ISM) said Tuesday that the outlook for manufacturing over the next two months is favourable, noting that backlogs last month rose the most in 11 years. Factories also saw strong growth in orders.

The survey, however, was conducted before Russia’s invasion of Ukraine last Thursday, which some economists said could further stifle supply chains, and especially worsen the shortage of semiconductors. The conflict has caused a spike in the prices of oil and wheat, among other raw materials. Russia and Ukraine are producers of key materials used to make semiconductors.

“The decline in coronavirus cases should help the domestic side of the economy improve further in the spring, but the fallout from rising energy and food prices and disruptions to international shipping related to the Russian-Ukrainian war pose a downside risk to near-term manufacturing,” said Bill Adams, chief economist at Comerica Bank in Toledo, Ohio.

The ISM index of national factory activity fell to 58.6 last month from 57.6 in January, which was the lowest since November 2020.

A reading above 50 indicates expansion in the manufacturing industry, which accounts for 11.9% of the US economy. Economists polled by Reuters had expected the index to rise to 58.0.

The six largest manufacturing industries – transportation equipment, machinery, computers and electronics, food, chemicals, and petroleum and coal products recorded moderate to strong growth.

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Manufacturing is picking up momentum in line with the broader economy after hitting a speed bump as coronavirus infections, driven by the Omicron variant, surged across the country. The United States is reporting an average of 69,704 new COVID-19 infections per day, a fraction of more than 700,000 in mid-January, according to a Reuters analysis of official data.

The ISM survey’s forward-looking new orders sub-index rose to 61.7 last month from 57.9 in January, the lowest reading since June 2020. Spending on goods jumped as the pandemic dampened demand for services such as travel. Even if spending shifts back to services as the health situation improves, economists expect demand for goods to remain strong.

Customer inventory has remained extremely low for over 60 months.

Wall Street stocks fell as the Russia-Ukraine crisis deepened. The dollar appreciated against a basket of currencies. US Treasury yields fell.

SLOWDOWN ON HIRING

The survey’s measure of factory employment slipped to a reading of 52.9 last month from a 10-month high of 54.5. It had increased for five consecutive months. According to Timothy Fiore, chairman of the ISM survey committee on manufacturing companies, “a higher than normal rate of quits and early retirements have continued.”

Manufacturers have reported difficulty in filling vacancies. At the end of December, there were nearly 10.9 million record job creations in the entire US economy.

The ISM gauge for unfinished work in factories rose to 65.0 from 56.4 in January. The 8.6 percentage point increase was the largest since January 2011. All six major manufacturing industries reported increased backlogs.

The backlog index fell 6.4 points in January, the biggest drop since April 2020. February’s reversal suggested global supply chains remained under strain.

This was also evident in the survey’s measure of supplier deliveries, which rose to 66.1 from 64.6 in January. A reading above 50% indicates slower deliveries to factories.

Manufacturers of computer and electronic products have complained that the “electronics supply chain is still a mess”. Similar sentiments were shared by their counterparts in the transportation equipment industry who stated that “the provision of transportation services continues to be a major issue for the supply chain”.

Manufacturers of electrical equipment, appliances and components have indicated that they “are unable to increase builds to reduce the backlog”.

Factory gate inflation remained high. The survey’s measure of prices paid by manufacturers fell to a still-high reading of 75.6 from 76.1 in January, indicating sustained inflationary pressures.

Inflation could pick up in the coming months as Russia faces severe disruptions to its exports of all commodities, from oil and metals to grain, after Western countries imposed tough sanctions.

“We expect the heat to stay on on prices for some time to come amid the continuing supply imbalance and rising energy and commodity costs following the invasion of Ukraine by Russia,” said Tim Quinlan, senior economist at Wells Fargo in Charlotte, North. Caroline.

Inflation was already a problem before the invasion, with annual consumer prices posting their biggest increase in 40 years in January. The Federal Reserve is expected to raise interest rates this month. Economists predict up to seven rate hikes this year.

A separate report from the Commerce Department showed construction spending rose 1.3% in January on Tuesday, boosted by strong spending in the construction of single-family homes and private non-residential structures. This followed a 0.8% rise in December.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)