U.S. manufacturing cooled in March as prices jumped. Factory activity ran at its slowest pace for three months in March, as new orders fell and inflation flared up, setting the economy on course for the first three-year stretch of inflation above the Federal Reserve's preferred range since 1995.

The Institute for Supply Management's factory index fell from 56.7 to 55.2 last month — well below the consensus forecast of 57.7 but still above the 50 level that separates expansion from contraction. The ISM index has held a reading above 50 for about three years in a row now, but this was the lowest reading since December.

Economists said the latest reading was especially disappointing after regional surveys of manufacturing had pointed to faster growth. The reading was still consistent with economic growth of about 3 per cent, they said.

The weaker performance of manufacturing was led by a sharp fall in new orders, which slipped from 61.9 to 58.4. Likewise, inventories dropped from 49.6 to 48.7. While ISM reports that employment fell from 55 to 52.5, the Labor Department is projected to report on April 7 that the U.S. added 190,000 jobs last month, 4,000 of which were at factories, according to a Bloomberg survey. A measure of prices paid by manufacturers climbed to the highest since November. The U.S. manufacturing group's gauge of prices paid — measuring inflationary pressures within the factory sector — rose to 66.5 in March from 62.5 in February. Higher raw-material costs and increasing delivery delays suggest companies may soon raise prices.

The production index provided silver lining in the report, rising from 57.4 to 57.5.

"Our concern is that growth could actually end up even lower than 3 per cent," said Paul Ashworth, an economist at Capital Economics, in a Financial Times article earlier this week.

Moody's Economy.com, however, was more sanguine about the figures. "The longer-term up-trend in the index is intact," said Daniel Jester, an analyst at the consultancy. "Inventories are extremely lean, global growth is firming and there are mounting unfilled orders."

"Manufacturing isn't accelerating as fast as it was a month ago, but it's only a little slower," said Chris Low, chief economist at FTN Financial in New York. "The report still shows a healthy manufacturing sector."

The Tempe, Arizona-based ISM surveys more than 400 companies in 20 industries, including clothing, printing, transportation, furniture and plastics to compile its index.