Manufacturing growing at fastest pace in 7 years

WASHINGTON (AP) -- U.S. manufacturers expanded at the fastest pace in nearly seven years last month, but a sudden rise in the price of raw materials could threaten their profits.

The Institute for Supply Management said Tuesday that its index of manufacturing activity rose to 61.4 in February, up from 60.8 the previous month. That's the highest reading since it reached the same level in May 2004. The ISM's index bottomed out at 33.3 in December 2008, its lowest point in nearly 30 years.

Any reading above 50 indicates expansion. The manufacturing sector has now expanded for the past 19 months.

The rebound in manufacturing is gaining momentum, the report showed. The new orders index rose to a seven-year high. A measure of order backlogs rose to its highest level in a year. And inventories are shrinking, both at manufacturers and their customers. All are signs that factory output is likely to keep growing.

"The recovery in the sector is both robust and on track," said Ian Shepherdson, an economist at High Frequency Economics.

Solid growth overseas, particularly in developing countries such as China, Brazil and India, has also helped by boosting exports. A measure of export orders rose to its highest level in more than 22 years.

And an employment index in the ISM's report topped 60 for only the third time in a decade, evidence that manufacturers are adding employees at a rapid clip.

But prices paid for steel, plastics, rubber and other raw materials rose for a third straight month, a sign that increasing production costs could spark higher inflation.

"Growth may not be as robust as we would like because of these rising commodity prices," said Brian Levitt, an economist at OppenheimerFunds.

Pricier gas and food reduce the amount of money consumers can spend on discretionary items such as computers and other electronics. Manufacturers may also eat some of the higher costs, which would cut into profit margins, Levitt said.

"While there are many positive indicators, there is also concern as industries related to housing continue to struggle and the prices index indicates significant inflation of raw material costs across many commodities," said Norbert Ore, chair of the ISM's survey committee.

On Capitol Hill, Federal Reserve Chairman Ben Bernanke said Tuesday that rising energy prices "don't pose a significant risk to the recovery or to overall inflation."

But a prolonged rise in the price of oil or other commodities would represent a "threat" to economic growth, Bernanke acknowledged.

The price of materials is another challenge for the struggling construction industry. The Commerce Department said Tuesday that spending by builders fell in January to a seasonally adjusted annual rate of $791.8 billion.

That's slightly above the decade low of $791.5 billion hit in August, and about half of the $1.5 trillion level that economists believe would signal a healthy construction sector. It could be another four years before construction recovers to that level, economists say.  Factories have rebounded at a healthy clip since the recession ended in June 2009. Americans have resumed spending on cars, appliances and other big-ticket items and businesses are investing in more industrial machinery and other heavy equipment.

U.S. automakers are reporting healthy sales increases, after stumbling badly in the recession. General Motors Co. said Tuesday that its February sales soared 49 percent. Deere & Co., the world's largest manufacturer of agriculture equipment, said last month that its quarterly net income more than doubled as rising prices for corn, wheat and other crops encouraged U.S. farmers to buy new machinery.

The Institute for Supply Management, based in Tempe, Ariz., compiles its manufacturing index by surveying about 300 purchasing executives across the country.

AP Economics Writers Jeannine Aversa and Martin Crutsinger contributed to this report.