U.S. Factory Activity Holds Ground in February as Input Costs Skyrocket, Adding to Inflation Fears

WASHINGTON, March 2 (Reuters) - U.S. manufacturing activity held steady in February, yet a sharp acceleration in the prices factories pay for materials underscored the stubborn inflation challenges facing the sector, a situation now compounded by soaring energy costs following military strikes in the Middle East.

The Institute for Supply Management (ISM) reported its manufacturing Purchasing Managers' Index (PMI) registered 52.4 in February, marginally down from 52.6 in January. A reading above 50 indicates expansion, marking the second consecutive month of growth after a prolonged contraction. The figure came in stronger than the 51.8 forecast by economists in a Reuters poll.

The relative stability in activity, however, was overshadowed by a dramatic spike in input costs. The ISM's prices-paid index jumped to 70.5 from 59.0 the prior month, reaching its highest level since October 2022 and far exceeding expectations of a rise to 60.0. This surge points to mounting cost pressures that are likely to filter through to consumers, driven in part by ongoing import tariffs and recent geopolitical shocks.

Over the weekend, a U.S.-led offensive against Iran sent global oil and gas prices sharply higher, disrupting Middle Eastern energy facilities and critical shipping lanes. This external shock adds a new layer of risk to an already fragile cost environment for manufacturers.

"The sector is caught in a vise," said Michael Thorne, a senior economist at Brandywine Global. "Steady demand, reflected in solid new orders and backlogs, is being met with constrained supply chains and rapidly rising costs. The tariff structure and now energy market volatility are creating a perfect storm for input price inflation."

The report noted that supplier delivery times lengthened further, while factory employment remained in contraction territory. Manufacturers have largely relied on layoffs and hiring freezes to manage headcount, with the sector shedding 83,000 jobs since the start of 2025.

While the technology and data center segments have seen a boost from AI investment, the broader "renaissance" once promised by protectionist trade policies has yet to materialize. Analysts now look to recent tax provisions, including making bonus depreciation permanent, to provide some offsetting support to capital investment this year.

Voices from the Ground

Sarah Chen, Supply Chain Manager, Ohio: "We're scrambling. Every week brings a new price hike notification from suppliers. The tariffs were one thing, but now with fuel costs exploding, our Q2 forecasts are out the window. We're having tough conversations about absorbing costs versus passing them on."

David Miller, Small Factory Owner, Michigan: (Emotionally charged) "It's a betrayal. We were told the tariffs would protect us and bring jobs back. Instead, my material costs are through the roof, I can't find reliable suppliers, and now this Middle East mess is going to bankrupt me with fuel surcharges. Washington's policies are literally killing Main Street manufacturing."

Dr. Anika Patel, Economics Professor, Stanford: "The data reveals a bifurcated reality. Aggregate activity is stable, even resilient, but beneath the surface, severe cost-push pressures are building. The Fed will be watching this prices-paid index very closely. It suggests the 'last mile' of inflation fighting could be protracted, especially if higher input costs become embedded in consumer prices."

Carlos Ruiz, CEO of a Texas-based Aerospace Parts Maker: "The new orders are there, which is encouraging. But profitability is the real battle. We're investing in automation not just for efficiency, but as a defense mechanism against these unpredictable cost surges. The policy environment demands that we adapt faster than ever."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Reuters Editorial)