WASHINGTON (AP) — U.S. manufacturing expanded in February at the fastest pace since June 2011, buoyed by increases in new orders and production. The third straight month of growth suggests factories may help the economy this year after slumping through most of 2012.
The Institute for Supply Management said Friday that its index of factory activity rose last month to 54.2, up from January's reading of 53.1. A reading above 50 indicates expansion. The ISM is a trade group of purchasing managers.
A measure of new orders rose to the highest level since April 2011. Factories added jobs, the report said, but at a slower pace than the previous month.
The pickup in factory activity in February is encouraging because it suggests demand for goods is stronger even as consumers are paying higher Social Security taxes, which has reduced their take-home pay.
That comes after a separate report Friday showed consumers cut back spending on long-lasting manufactured goods in January, likely because of the higher taxes.
Factory output could rise in the coming months. In January, businesses ramped up their orders for industrial machinery, electrical equipment and other capital goods by the most in more than a year. That suggested they are confident about their future growth.
Consumer confidence rebounded in February after a steep fall the previous month. The recovery in confidence suggests a better job market and a sustained housing recovery could offset some of the pain from higher taxes.
One concern is $85 billion in government spending cuts that are set to take effect Friday. Those cuts will force the Defense Department and other agencies to buy fewer goods, which could weigh on manufacturers.
Consumer spending may remain weak for several more months because of the tax increase. And an ongoing recession in Europe is likely to hold back exports to that region.
Industrial production fell in January after two months of increases, the Federal Reserve said. Much of the decline reflected a big drop in auto production that was likely temporary. With sales rising, production will likely rebound in February.
The economy expanded at only a 0.1 percent annual rate in the October-December quarter, the government said Thursday. That was the slowest growth in nearly two years.
Still, economists said the weakness in the fourth quarter was caused by temporary factors — deep defense spending cuts and slower restocking by companies. They expect growth will rebound to a rate of around 2 percent in the current January-March quarter.
They note that residential construction, consumer spending and business investment — core drivers of growth — all improved in the fourth quarter.
A note from the Manufacturers Alliance for Productivity and Innovation (MAPI):
“The Institute for Supply Management (ISM) reported that its Index increased to 54.2 from 53.1 in January. A diffusion index greater than 50 indicates that manufacturing is growing,” noted Daniel Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “The Index has been at 54.2 or higher only about one-third of the time over the last 20 years. Clearly, the ISM report for February is very favorable and suggests that manufacturing activity last month was growing at a rapid pace.
“The indictors for new orders, production, and backlogs all surged in February from the previous month and most of the report’s other indexes of manufacturing activity moved in a favorable direction,” he added. “The only concerns are that more respondents reported rising prices and imports rebounded slightly faster than exports.
“Overall, the February ISM report suggests strong growth in the upcoming February industrial data,” Meckstroth concluded. “Some caution is appropriate, however. February may be a euphoric period following the resolution of the fiscal cliff but it precedes the headwinds of sequester and federal shutdown deadlines this month. MAPI expects manufacturing production to increase 2.2 percent this year, which is slower pace than the 4.2 percent growth in 2012.”