WASHINGTON: US manufacturing activity increased to a three-year high in February amid a surge in new orders, but factories continued to face higher costs for raw materials and other inputs as the pandemic drags on.

The acceleration reported by the Institute for Supply Management (ISM) on Monday was despite a global semiconductor chip shortage, which has hurt production at automobile plants.

It was the latest indication of strong economic performance early in the first quarter, thanks to nearly $900 billion in additional COVID-19 relief money from the government and a drop in new coronavirus infections and hospitalizations.

The ISM said its index of national factory activity rebounded to a reading of 60.8 last month from 58.7 in January. That was the highest level since February 2018.

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 edging up to 58.8 in February.

Manufacturing has been driven by strong demand for goods like electronics and furniture, as 23.2% of the labour force works from home because of the virus. Demand could, however, shift back to services in the summer as more Americans get vaccinated, and slow manufacturing activity from current levels.

But the year-long pandemic has gummed up the supply chain, boosting production costs for manufacturers. The survey’s measure of prices paid by manufacturers jumped to a reading of 86.0, the highest since May 2008, from 82.1 in January.

The ISM’s forward-looking new orders sub-index increased to a reading of 64.8 last month from 61.1 in January. Factories also received more export orders and order backlogs swelled. As a result, factories stepped up hiring last month.

The survey’s manufacturing employment gauge rose to 54.4, the highest reading since March 2019, from 52.6 in January.

That offers cautious optimism that employment growth picked up last month after nonfarm payrolls increased by only 49,000 jobs in January. The economy has recovered 12.3 million of the 22.2 million jobs lost during the pandemic.

A separate report from the Commerce Department on Monday showed construction spending increased 1.7% to $1.521 trillion in January, the highest level since the government started tracking the series in 2002. Construction spending rose 1.1% in December.