Business at U.S. manufacturers grew a bit more slowly for a second straight month in April but their costs rose to the highest level in nearly three years, an industry report showed on Monday.

The economy showed other signs of crawling back to health, including a pickup in spending on construction, albeit too slowly to generate brisk employment gains.

The economy is not falling apart despite the spike in oil prices, said Joel Naroff, of Naroff Economic Advisors in Holland, Pa. Firms are hiring, adding to inventories, seeing demand rise and exporting. Those are not signs of malaise.

U.S. factory activity eased to 60.4 in April from 61.2 the previous month, the Institute for Supply Management said, a touch higher than economists' forecasts. The index for prices paid rose to 85.5 from 85, the highest since July 2008.

Growth in new orders, output and hiring all eased from March but suggested the economy could withstand costlier energy. A sharp decline in the value of the U.S. dollar helped the export-heavy sector.

Analysts cautioned that progress toward healthier economic conditions is likely to remain painfully slow.


Ian Shepherdson, of High Frequency Economics, said an increase in factory inventory in April was likely an unwanted development that could lead to a cooling in production.

We are quite pleased by the headline index, but it is likely not sustainable, Shepherdson said. We expect the headline to dip to 57 or so over the next couple of months.

The Federal Reserve last week said the economy was clawing back from its deep recession at a moderate pace and showed it was in no rush to remove its support, despite some signs of inflation pressures building.

The U.S. central bank said on Monday its latest survey of senior loan officers showed that banks had made it easier to get loans in the first three months of 2011 -- a positive for the economy after a lengthy period of caution about lending.

Some banks that had eased standards and terms ... pointed to a more favorable or less uncertain economic outlook, the Fed said.

A separate report on borrowing by small businesses -- which account for most U.S. hiring -- showed loan demand rose again in March, albeit a bit more slowly than in recent months.

The Thomson Reuters/PayNet Small Business lending Index increased 12 percent from March 2010. It tracks loans that are taken out for equipment purchases or to update factories.


Other purchasing manager surveys from around the globe showed that while activity softened in the United States and China -- the two largest economies -- it firmed in Europe and India.

The euro hit a 17-month high against the dollar on Monday as investors bet that interest rates in the euro zone would continue to rise while the Fed would keep them on hold.

Another report showed the battered U.S. construction industry managed a 1.4 percent rise in investment spending in March. But February's spending was revised down to a 2.4 percent drop, tempering the report's impact.

The softer tone to U.S. economic data is expected to show up in Friday's closely watched monthly report on employment.

Economists surveyed by Reuters forecast that 186,000 jobs were created in April, less than March's 216,000 and not enough to bring the unemployment rate below a lofty 8.8 percent.

Data last week showed overall U.S. growth slowed to a 1.8 percent annual rate in the first quarter, off its 3.1 percent pace over the final three months of 2010.

Economists said consumers were spending less as higher food and gasoline prices dented their incomes.

Last week, U.S. Treasury Secretary Timothy Geithner said the economy faces new headwinds from soaring oil prices, but said a forecast of 3 percent to 4 percent growth for the year as a whole was reasonable.

(Additional reporting by Lucia Mutikani and Pedro Nicolaci da Costa in Washington; writing by Glenn Somerville; Editing by Andrew Hay and Dan Grebler)