WASHINGTON (Reuters] – U.S. manufacturing activity unexpectedly slowed during March. While tight supply chains continue to push input prices higher than expected, factories increased their hiring and were able to reduce unfinished work.

According to the Institute for Supply Management, Friday’s reading for its national factory activity index fell from 58.6 February to 57.1 in May.

An index reading higher than 50 means that there has been an increase in the manufacturing sector, which is 11.9% of America’s economy. Reuters polled economists to forecast that the index would rise to 59.0.

A shift back towards services has led to a slowdown in manufacturing. This is despite a substantial decline in COVID-19 infection rates, which have resulted the removal of many restrictions in the country. On Thursday, government data showed that consumer spending on services rose by 7.5% in February. But goods outlays fell.

From 61.7 in February, the forward-looking sub-index of ISM’s ISM Survey measured 53.8 new orders last month. As the pandemic reduced demand for travel services, goods spending soared. Even though spending has reverted back to services it is important for manufacturing to remain supported by extremely low inventories. For more than 60 years, customer inventories have been extremely low.

Russia’s conflict with Ukraine is likely to have impacted the supply chain improvements in the world. It has raised the prices for oil, wheat, and other commodities.

From 66.1 in February, the ISM survey measured supplier deliveries at 65.4. If the reading is higher than 50%, it means slower factory deliveries.

This kept the inflation rate at the factory gates very high. From 75.6 in February, the survey measured manufacturers’ prices at 87.1.

Federal Reserve increased its policy interest rates by 25 basis points last month. This is the Federal Reserve’s first major hike in three years.

According to the survey, factory employment rose from 52.9 in February to 56.3 in March. The gauge of unfinished factory work fell from 65.0 to 60.0 in February due to more workers.