Manufacturing grew in February at its fastest rate in nearly seven years as companies' willingness to hire improved at the strongest pace in decades.
Prices paid, a gauge of inflation, also rose, though slightly less than expected, according to an industry report released on Tuesday. The manufacturing data echoed reports around the world as factory input costs rose, while euro zone and British manufacturing grew strongly.
It was the 19th consecutive month the U.S. manufacturing sector has grown, coming in slightly above expectations. The sector has outpaced other parts of the economy that continue to lag and makes up just over 11 percent of the economy overall.
The data supported forecasts that Friday's U.S. nonfarm payrolls report will show a strong improvement after only a small gain in January.
In the manufacturing sector, employment-wise as well as production-wise, we are in a very strong phase here. No signs of it slowing down, said Kurt Karl, chief U.S. economist at Swiss Re in New York.
Karl said the sector continues to look good despite rising oil prices and unrest in the Middle East, though he added that oil prices are very high.
Concerns about inflation have grown amid political tensions in the Middle East and northern Africa that pushed the price of oil to its highest in 2-1/2 years last week. U.S. crude pushed near $100 a barrel on Tuesday on supply disruptions and the potential for more political unrest.
The Institute for Supply Management said its index of national factory activity rose to 61.4 in February from 60.8 in January, topping forecasts for 61.0. It was the highest level since May 2004.
A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion. Fourteen out of 18 manufacturing industries reported growth last month, ISM said.
The report's prices paid component rose to 82 from 81.5 the month before. Economists had expected a reading of 83.0.
JOBS IN VIEW
The report's employment index rose to 64.5 from 61.7, its highest level since January 1973. Analysts said the data bodes well for manufacturing payrolls in Friday's U.S. employment report.
The strength of the ISM index, the drop in jobless claims and survey evidence all suggest we will see an above-consensus increase in February payroll employment, Chris Low, chief economist at FTN Financial, wrote in a research note.
Economists polled by Reuters are expecting the report to show the U.S. economy created 185,000 jobs in February, compared to 36,000 in January. Jobs in manufacturing are expected to rise by 25,000.
U.S. markets saw little reaction immediately following the data as investors focused on testimony from Federal Reserve Chairman Ben Bernanke.
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.
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.
Elsewhere in the manufacturing sector, General Motors Co
GM reported sales were up 46 percent, and Ford Motor Co
Other U.S. data on Tuesday gave a more mixed view of the economy. Construction spending fell more than expected in January to its lowest level in five months.
Data on small businesses suggested the recovery will remain a slow slog as borrowing rose in January from the prior year but fell compared to December, according to PayNet.
(Additional reporting by Chris Reese; Editing by Padraic Cassidy)