US manufacturing activity steady, factory gate inflation surges

* Manufacturing PMI little changed at 52.4 in February

* Steel, aluminum prices as well as tariffs drive up input costs

* Factory employment remains subdued; businesses not filling open positions

By Lucia Mutikani

WASHINGTON, March 2 (Reuters) - U.S. manufacturing activity grew steadily in February, but a gauge of prices at the factory gate raced to a near 3-1/2-year high amid tariffs, highlighting upside risks to inflation even before a U.S.-led attack on Iran sent oil prices rocketing. The surge in input prices at factories reported by the Institute for Supply Management on Monday and jump in oil prices following attacks by the United States and Israel, which killed Iran's Supreme Leader Ayatollah Ali Khamenei, and retaliation by Tehran, bolstered economists' expectations that the Federal Reserve would not cut interest rates for a while. The government last week reported an acceleration in producer prices in January.

"The surge in the prices paid index will raise some eyebrows at the Fed, however, as it suggests further goods inflation pressures were in the pipeline even before factoring in the surge in oil prices due to events in the Middle East," said Thomas Ryan, a North America economist at Capital Economics.

The ISM said its manufacturing PMI was little changed at 52.4 last month compared to a reading of 52.6 in January. It was the second straight month that the PMI was above the 50 level, which indicates expansion. Economists polled by Reuters had forecast the PMI falling to 51.8. Factory activity rebounded in January after 10 consecutive months in contraction territory.

Twelve industries, including primary metals, machinery, electrical equipment, appliances and components as well as transportation equipment, miscellaneous manufacturing and computer and electronic products reported growth. Among the five that contracted were furniture and related products, and food, beverage and tobacco products.

The survey offered a mixed picture of manufacturing, with many businesses still complaining about tariffs while others viewed conditions as stabilizing. President Donald Trump's broad tariffs have constrained manufacturing, which accounts for 10.1% of the economy. The U.S. Supreme Court last month struck down the tariffs that Trump had pursued under a law meant for use in national emergencies. But Trump swiftly imposed a 10% global tariff for 150 days to replace some of the emergency duties and then announced it would rise to 15%.

Amid the tariff gloom, the technology parts of manufacturing have received a boost from the accelerated adoption of artificial intelligence and construction of data centers. Manufacturing has yet to experience the rebirth that Trump envisioned with his import duties. Factory employment has declined by 83,000 jobs since January 2025.

Some makers of transportation equipment said tariffs were "raising prices while lowering demand and profitability," noting that "American-produced commodities like steel and aluminum are the highest priced in the world, by far."

TARIFFS STILL A CONSTRAINT

Producers of miscellaneous manufactured goods said they were "spending significant effort to work with our supply base to mitigate tariff impacts."

Machinery manufacturers reported that tariff policy changes affected "total acquisition costs and purchasing source decisions," adding that because of tariffs, "most raw materials used in manufacturing, such as steel and wire, need to be sourced domestically, and the cost keeps going up."

Some makers of computer and electronic products reported they continued "to be impacted by tariffs," and were "seeing metals prices rise too." But others in the industry said "Overall orders and supply footprint are improving."

Chemical products manufacturers reported positive signs for "growth opportunities," but complained they continued "to receive price increase notifications from suppliers based on unsupported tariff claims."

The most upbeat views came from the fabricated metal products sectors, where some manufacturers said business was "improving by the week," and that backlog was "growing, and new opportunities are everywhere." Some said they had hired "experienced engineers, computer numerical control operators, and young people wanting to become CNC machinists."

Economists expect tax legislation, which made bonus depreciation permanent among other perks, to support manufacturing this year.

Stocks on Wall Street were trading higher. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. Financial markets lowered expectations for a rate cut at the U.S. central bank's June meeting, CME's FedWatch Tool showed.

The ISM survey's forward-looking new orders sub-index slipped to 55.8 after soaring to 57.1 in January, which was the highest level since February 2022. But a measure of backlog orders jumped to the highest reading since May 2022. Export orders were steady.

Supplier delivery performance continued to deteriorate. The survey's supplier deliveries index rose to 55.1 from 54.4 in the prior month. A reading above 50 indicates slower deliveries.

With deliveries taking longer, prices for inputs shot up. The survey's prices paid measure soared to 70.5, the highest level since June 2022, from 59.0 in January.

ISM Manufacturing Business Survey Committee Chair Susan Spence said the price gauge "continues to be driven by increases in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods." The rise mirrored a surge in producer goods prices, excluding food and energy, in January and suggested more pass-through from tariffs was coming. Additional price pressures could come from the conflict in the Middle East, which has disrupted shipping in the crucial Strait of Hormuz and sent oil prices rising by as much as 13% on Monday.

Factory employment remained subdued. The survey's measure of manufacturing employment edged up to 48.8 from 48.1 in January. Manufacturers were not filling open positions to manage headcount, the ISM said.

"This has to be a discomforting reading for the Fed following the troubling January PPI report that was released last week," said John Ryding, chief economic advisor at Brean Capital. "The manufacturing sector is at an important point in determining how to deal with new Section 122 tariffs and it is in this environment that any oil price shock will hit."

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