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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 pickup in factory activity in February was encouraging because it showed demand for goods is stronger even as consumers have less take-home pay because of higher Social Security taxes. It followed a separate report that consumers cut back spending on long-lasting manufactured goods in January, likely because of the tax increase.
U.S. manufacturers are also showing strength just also billions of dollars in across-the-board government spending cuts are set to start. The cuts threaten to slow growth later this year.
"In short, a surprisingly positive report," Jim O'Sullivan, an economist at High Frequency Economics, said in a note to clients. "The data should lessen fears that the economy will not be able to withstand" the spending cuts.
The improvement in manufacturing helped stocks rebound after falling sharply in early trading after the consumer spending report was released. The Dow Jones industrial average rose about 12 points in midmorning trading.
The survey showed a measure of new orders rose to the highest level since April 2011, production increased to a 10-month high and factories added jobs.
Export orders rose, despite Europe's ongoing recession and slower growth in China. And order backlogs increased for the first time in a year, a sign manufacturers can't keep up with demand.
The improvement was broad-based, with 15 of the 18 industries tracked by the survey showing expansion. The only three that contracted were textiles, computer and electronic products, and chemicals.
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 the $85 billion in government spending cuts, which will force the Defense Department and other agencies to buy fewer goods. That could weigh on manufacturers.
Consumer spending may remain weak for several more months because of the tax increase.
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.