US manufacturing, new homes sales signal booming economy

US factory activity powered ahead in early April, though manufacturers increasingly struggled to source raw materials and other inputs as a reopening economy leads to a boom in domestic demand, which could slow momentum in the months ahead.

The flow of strong economic data continued with another report on Friday showing new home sales racing to a more than 14-1/2-year high in March. The economy is being boosted by the White House’s massive $1.9 trillion COVID-19 pandemic rescue package and increased vaccinations against the virus.

Retail sales jumped to a record high in March and hiring accelerated, cementing expectations for robust growth in the first quarter and setting up the economy for what could be its best performance in nearly four decades.

Data firm IHS Markit said its flash US manufacturing PMI increased to 60.6 in the first half of this month. That was the highest reading since the series started in May 2007 and followed 59.1 in March.

Economists polled by Reuters had forecast the index rising to 60.5 in early April. A reading above 50 indicates growth in manufacturing, which accounts for 11.9% of the US economy.

“The U.S. economy is enjoying a strong start to the second quarter, firing on all cylinders as loosening virus restrictions, an impressive vaccine roll-out, a brighter outlook and stimulus measures all helped boost demand,” said Chris Williamson, chief business economist at IHS Markit.

More than half of American adults have had at least one vaccine dose, according to the U.S. Centers for Disease Control and Prevention (CDC). A third of US adults are fully vaccinated. That, together with the fiscal stimulus, has allowed for broader economic re-engagement.

But the strong demand is pushing against supply constraints. The pandemic has disrupted labor at factories and their suppliers, causing shortages that are boosting prices of materials and other inputs.

The IHS Markit survey’s measure of prices paid by manufacturers jumped to the highest level since July 2008. It attributed the higher input prices to “severe supplier shortages and marked rises in transportation fees.”

The continued rise in input costs is one of many factors expected to drive inflation above the Federal Reserve’s 2% inflation target this year.

Fed Chair Jerome Powell has expressed confidence that the supply chains will adapt and become more efficient, and prevent prices from remaining higher for a sustained period.

According to IHS Market supply shortages were causing backlogs of uncompleted work “of a magnitude not surpassed for over seven years.”

The raw material squeeze is most evident in the automobile industry, where a global semiconductor shortage has forced production cuts at motor vehicle assembly plants.