February Business Activity Strengthens, But So Do Prices

Worker wearing face mask in manufacturing plant

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Business activity rose at the fastest pace in six years in February thanks to the service sector, with soaring costs driving prices higher and signaling further  inflation may be ahead.

IHS Markit said its U.S. Composite Output Index, measuring business activity, edged up to 58.8 in February from 58.7 in January on a seasonally adjusted basis to post the sharpest rise since March 2015. A measure above 50 indicates growth in the economy.

The jump in business activity was driven by strong demand in the service sector, which accelerated at its fastest pace in almost six years, rising to 58.9 this month from 58.3 in January. Service companies also saw the steepest increase in costs and passed them onto customers at the sharpest rate on record, both since 2009.

In contrast, manufacturing activity slipped to a four-month low of 57.7 from 60.5 in January as a result of extreme weather and widespread supply shortages. In fact, supplier delay times hit a record high during the month, causing input costs to rise at the fastest rate in a decade. To cope, companies passed along those costs by increasing their selling prices at the fastest pace in 13 years. 

“The data add to signs that the economy is enjoying a strong opening quarter to 2021, buoyed by additional stimulus and the partial reopening of the economy as virus related restrictions were eased on average across the country,” said Chris Williamson, chief business economist at IHS Markit. But “a concern is that firms costs have surged higher, driving selling prices for goods and services up at a survey record pace and hinting at a further increase in inflation.”