03/01/2012 01:48 EST | Updated 05/01/2012 05:12 EDT

Manufacturing activity expands in February at weaker pace as growth in new orders slows

WASHINGTON - Manufacturing activity grew more slowly in February as U.S. factories received fewer new orders and paid higher prices for raw materials.

The Institute for Supply management, a trade group of purchasing managers, said Thursday that its manufacturing index fell last month to 52.4 from 54.1 in January.

The reading was the lowest since November. Still, any reading above 50 indicates expansion.

New orders increased, but at a far slower pace than the month before. Production and employment also grew more slowly.

Exports increased sharply, a sign that Europe's debt crisis has not yet dampened overseas sales by U.S. factories as many had feared.

U.S. factory activity has expanded for 31 straight months, according to the index.

The report "is hardly a disaster, but it does support our view that the economy is not quite as strong as recent data have led others to believe," said Paul Dales, senior U.S. economist with Capital Economics, in a note to clients.

New orders remain strong, suggesting that the factories will continue to grow, Dales said. But he said the slowdown in hiring suggests that factory payrolls stopped growing after they added an impressive 50,000 jobs in January.

Mixed reports from Asia and Europe appeared to confirm that the global economic recovery is on track, but uneven.

China's factory activity strengthened in February, helped by a surge in new orders, exports and production, according to a government survey of purchasing managers. It was the best reading since June and the third straight month of improvement for the index.

Japan had said a day earlier that the country's factory production rose for a second month in January.

Yet in Europe, manufacturing continued to contract, dragged down by record-low readings in Greece and slowing production in Spain, Italy and Ireland. Some of the 17 nations using the euro are in deep recession; others are teetering on the brink.

The European manufacturing purchasing managers index edged up to 49 from 48.8 in January, according to Markit, the data firm that compiles the survey. Growth in Austria, the Netherlands and Germany offset weakness elsewhere. It was the best reading in six months. Still, any reading below 50 indicates contraction.

U.S. manufacturing has grown in part because consumers are spending more on cars, appliances and computers. Auto sales have rebounded strongly from the spring, when Japan's earthquake and tsunami interrupted supply chains and fewer cars were available on dealer lots.

Businesses have also stepped up spending on industrial machinery and other capital goods last year, partly to take advantage of an investment tax credit. Orders for those goods slipped in January after the tax credit expired. But most economists expect demand for industrial goods to keep growing this year.

Industrial output jumped in January, the Federal Reserve said, after rising by the most in five years in December. And manufacturing expanded in all 12 of the Federal Reserve's bank districts, the Fed said in a separate report Wednesday.

Auto manufacturing, steel makers and other metal producers all reported solid growth, the central bank said. At the same time, some manufacturers expressed concerns that Europe's financial crisis and slowing economy could cut into their exports this year.

More hiring is helping to increase consumer spending and economic growth. The economy is likely to expand by about 2.5 per cent this year, according to a survey by the National Association of Business Economics. That's up from 1.7 per cent in 2011.

Manufacturers have been a big source of that hiring. The sector accounts for only about 9 per cent of total payrolls but added 13 per cent of the new jobs last year. In January, they accounted for one-fifth of the 243,000 net jobs added.


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