US manufacturing sector edges up in August

US manufacturing activity unexpectedly picked up in August amid strong order growth, but a measure of factory employment dropped to a nine-month low, likely as workers remained scarce.

The Institute for Supply Management (ISM) said on Wednesday its index of national factory activity inched up to 59.9 last month from a reading of 59.5 in July.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the US economy. Economists polled by Reuters had forecast the index falling to 58.6.

Manufacturing is holding up even as spending is rotating back to services from goods because of vaccinations against Covid-19. But shortages of labor and raw materials, especially semiconductors, remain a constraint.

The ISM survey's forward-looking new orders sub-index rebounded to a reading of 66.7 last month after two straight monthly declines. Demand is being driven by businesses desperate to replenish stocks after inventories were drawn down sharply in the first half of the year.

Inventory accumulation, which is expected to be the main driver of gross domestic product growth for the rest of this year and into 2022, has been frustrated by supply constraints.

Scarce inputs have boosted prices for both manufacturers and consumers. But there appears to be light at the end of the tunnel. The ISM measure of delivery performance of suppliers to manufacturing organizations eased further in August, indicating some improvement in the pace of deliveries.

The survey's measure of prices paid by manufacturers fell to an eight-month low of 79.4 from a reading of 85.7 in July. This measure has dropped from a record 92.1 in June.

It was the latest indication that inflation has probably peaked. Data last week showed the Federal Reserve's preferred inflation measure recorded its smallest monthly gain in five months in July.

But worker shortages persist. A measure of factory employment contracted last month and fell to its lowest level since November. That could pose some downside risk to job growth in August. According to a Reuters survey of economists, nonfarm payrolls likely increased by 750,000 last month after rising 943,000 in July.

The pandemic has upended the labor market dynamics, creating labor shortages even as 8.7 million people are officially unemployed. The were a record 10.1 million job openings at the end of June.

Lack of affordable child care, fears of contracting the coronavirus, generous unemployment benefits funded by the federal government as well as pandemic-related retirements and career changes have been blamed for the disconnect.

The labor shortage is expected to ease starting in September. The government-funded unemployment benefits lapse on Sept. 6 and schools are reopening for in-person learning.

But a resurgence in new Covid-19 cases, driven by the Delta variant of the coronavirus, could cause reluctance among some people to return to the labor force.

The worker shortages led to a building up of the backlog of uncompleted work in August.