After steady growth in December and January, U.S. manufacturing expanded in February at the fastest pace since mid-2004, signaling that the factory sector continues to lead the economic recovery.

Business activity in the United States manufacturing sector posted strong growth in December and January, and the rate of expansion accelerated in February thanks to major gains in orders, employment and exports. Last month, manufacturing grew at a near-record pace, confirming that U.S. factories continue to be at the forefront of the economic recovery.

According to the Institute for Supply Management’s (ISM) latest manufacturing Report on Business, released yesterday, U.S. manufacturing expanded for the 19th consecutive month in February, while the overall economy grew for the 21st consecutive month.

The ISM’s purchasing managers’ index (PMI), a key monthly gauge of the factory sector, rose to 61.4 in February, the highest level since May 2004 and up from January’s reading of 60.8. Readings above 50 indicate growth. The 0.6-point gain last month shows that manufacturing continues to expand at an accelerating pace. The February PMI was above the 12-month average of 57.9.

“New orders and production, driven by strength in exports in particular, continue to drive the composite index (PMI),” Norbert J. Ore, chair of ISM’s Manufacturing Business Survey Committee, said. “New orders are growing significantly faster than inventories, and the Customers’ Inventories Index indicates supply chain inventories will require continuing replenishment. The Employment Index is above 60 percent for only the third time in the last decade.”

The latest monthly findings exceeded expectations, as economists polled by MarketWatch had forecast the PMI to edge up to only 61 in February.

The ISM’s new orders index also posted growth last month, climbing from 67.8 in January to 68. Meanwhile, the production index rose from 63.5 to 66.3, supplier deliveries grew from 58.6 to 59.4 and the employment index jumped from 61.7 to 64.5, marking the third time in 10 years that it has risen above 60.

“At 61.4 percent, the ISM index is at the highest level in this recovery and at the high end of the historic range for this indicator,” Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, said in an analysis of the ISM report. “The last time the index was this high was in mid-2004 when the manufacturing sector decisively broke out of the 2001 recession. All the important components, such as orders, production, employment and exports are at lofty levels and improving from the previous month.”

Fourteen of the 18 industries tracked by the ISM reported growth last month: apparel, leather and allied products; petroleum and coal products; transportation equipment; electrical equipment, appliances and components; machinery; chemical products; fabricated metal products; computer and electronic products; textile mills; food, beverage and tobacco products; printing and related support activities; paper products; wood products; and miscellaneous manufacturing.

Manufacturing sales and production are also expected to increase in 2011 due to government-sponsored incentives that are focused on accelerating capital goods purchasing.

“Factories may receive a boost this year from a government program that accelerates tax depreciation for equipment purchases,” Bloomberg News explains. “The incentive is part of an $858 billion bill signed by President Barack Obama in December that extends tax cuts for two years, continues expanded unemployment insurance benefits through 2011 and trims payroll taxes.”

However, despite these promising signs, pricing pressures are expected to become a mounting problem in the near future. ISM’s prices index rose to 82 in February, up from 81.5 in January and the highest reading since July 2008. It also marked the 20th consecutive month of rising prices, with 66 percent of respondents reporting paying more than they did in January.

Ore said that the jump in prices was the only “big negative” in what was otherwise “another great month” for U.S. factories, Bloomberg News notes: Increases in commodities such as steel and oil are hurting profits, which may lead some companies to pass the costs on to customers, he said in a press conference.

International events are also raising concerns over the potential for inflation, as turmoil in the Middle East has caused a surge in oil prices and manufacturing giant China is struggling to manage its inflation problems.

“Bernanke told the Senate Banking Committee the recent surge in oil prices is unlikely to have a big impact on the U.S. economy but could lead to weaker growth and higher inflation if sustained,” Reuters reports. “Globally, China bucked the trend as factory growth slipped to its slowest pace in six months as authorities try to keep inflation in check. Even so, factory input prices in China rose to three-month highs.”

Earlier

Manufacturing Growth Accelerates into 2011

Manufacturing Grows at Faster Pace in January

Resources

February 2011 Manufacturing ISM Report on Business
Institute for Supply Management, March 1, 2011

Manufacturers See Fastest Growth Since 2004
by Jeffry Bartash
MarketWatch, March 1, 2011

MAPI Analysis on ISM Report: Index at ‘High End’ of Historic Range
by Daniel J. Meckstroth
Manufacturers Alliance/MAPI, March 1, 2011

U.S. Economy: Manufacturing Expands by Most Since 2004
by Timothy R. Homan and Robert Willis
Bloomberg News, March 1, 2011

Manufacturing Strongest in Nearly 7 Years
by Leah Schnurr
Reuters, March 1, 2011