WASHINGTON, May 21 (Reuters) - U.S. factory activity gathered speed in early May amid strong domestic demand, but backlogs of uncompleted work are piling up as manufacturers struggle to find raw materials and labor, boosting costs for both businesses and consumers. Data firm IHS Markit said on Friday its flash U.S. manufacturing PMI increased to 61.5 in the first half of this month. That was the highest reading since the survey was expanded to cover all manufacturing industries in October 2009, and followed a final reading of 60.5 in April. Economists polled by Reuters had forecast the index dipping to 60.2 in early May. A reading above 50 indicates growth in manufacturing, which accounts for 11.9% of the U.S. economy. Demand shifted to goods from services as the COVID-19 pandemic kept Americans at home, causing supply constraints. The virus also disrupted labor at manufacturers and their suppliers, leading to raw material shortages across industries. More than a third of the population has been vaccinated, allowing the broader economy to reopen. While that, together with nearly $6 trillion in pandemic relief provided by the government over the past year, is unleashing pent-up demand for services, appetite for goods remains healthy. According to IHS Markit “manufacturers highlighted that strain on capacity and raw material shortages are expected to last through 2021.” It noted that the supply crunch was raising production costs for manufacturers, who “made efforts to pass higher cost burdens on to clients.” The IHS Markit survey’s measure of prices paid by manufacturers rose to the highest level since July 2008. Federal Reserve officials generally view the supply chain bottlenecks as transitory and expect them to temporarily drive inflation above the U.S. central bank’s 2% target. There is also acknowledgment that the bottlenecks could take longer to ease. Minutes of the Fed’s April 27-28 policy meeting published on Wednesday showed “a number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly,” and that this “could put upward pressure on prices beyond this year. These officials also “noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated.” The raw material squeeze is most evident in the automobile and electronics industries, where a global semiconductor shortage has forced production cuts. According to IHS Market, backlogs of work accumulated early this month at the fastest pace in 14 years. The survey said its measure of new orders increased and that though factories tried to recruit more workers, the pace of hiring was the slowest in five months. Booming demand also boosted the services sector, which bore the brunt of the pandemic. The IHS Markit’s flash services sector PMI surged to 70.1, the highest since the series started in October 2009, from a final reading of 64.7 in April. The services sector accounts for more than two-thirds of U.S. economic activity. The strength in manufacturing and the services industries lifted overall business activity. The survey’s flash composite PMI output Index, which tracks the manufacturing and services sectors, rose to 68.1 from a final reading of 63.5 in April. (Reporting By Lucia Mutikani Editing by Chizu Nomiyama) Our Standards: The Thomson Reuters Trust Principles.