Manufacturing in New York state rose to a nine-month high in March, but a sharp slowing in new orders suggested that economic growth could be less robust in future months.
Meanwhile, the U.S. Federal Reserve maintained its ultra-loose monetary policy on Tuesday, saying the economy was gaining traction while flagging potential inflation risks from costlier energy and food.
The New York Federal Reserve's Empire State manufacturing survey released on Tuesday, one of the earliest monthly guideposts to U.S. factory conditions, also showed an acceleration in prices paid in another sign that inflation is starting to build.
Although smaller than the vast services sector, manufacturing has been a driver of the economic recovery helped by demand from emerging markets and corporate inventory building. But efforts to slow China's rapid rate of growth, as rising oil prices, Middle East unrest and the Japanese earthquake could all could stymie further gains.
Manufacturing is running strong right now, but we may be turning the corner, given the moderation in Asia, especially China, said Yelena Shulyatyeva, U.S. economist at BNP Paribas in New York.
Lofty oil prices helped drive U.S. import prices higher in February for the fifth consecutive month, a separate report showed.
The Empire State general business conditions index rose to 17.50 from 15.43 in February, topping a Reuters forecast of 17.00. It was the highest level since June 2010, but the new orders and shipments indexes both declined, suggesting there was some underlying weakness.
New orders have moderated quite a lot. It's sending a weaker signal about manufacturing than what the headline number suggests, said Shulyatyeva.
The new orders index fell to 5.81 from 11.80, while shipments declined to 1.62 from 11.31.
The prices paid index rose to 53.25, the highest level since August 2008, from 45.78. Prices received also rose as manufacturers passed along costs.
In a positive sign, employment gauges expanded. The index for the number of employees rose to 9.09 from 3.61 in February, and the average employee workweek index was up at 15.58 from 6.02.
Despite recent signs of improvement in the labor market, the pace of hiring has been slow.
Chris Low, chief economist at FTN Financial, said the Empire State index is more volatile than the national report from the Institute for Supply Management and the regional figures from Chicago and Philadelphia, especially given the rough weather conditions in January and February.
The survey suggests a pickup in hiring in March but a slowdown in the leading components of the index, which may lead to a slowdown down the road. In the meantime, price pressures are evident, but it is not yet translating into efforts to control payroll costs, according to Low.
PRICES IN PLAY
Import prices jumped 1.4 percent, a U.S. Labor Department report showed on Tuesday. Fuel import prices accounted for most of the increase, rising 4.0 percent compared to non-fuel prices which rose 0.3 percent.
With gasoline prices rising, inflation pressure will remain high for the next several months, according to Wells Fargo analysts.
Inflation concerns recently have come to the forefront on worries that rising energy and commodity prices could temper the economic recovery.
The Federal Reserve said in a statement following its rate-setting meeting that inflation concerns surrounding a recent spike in energy and food prices would most likely prove transitory.
The central bank also maintained its ultra-loose monetary policy, as expected, saying the economy was gaining traction.
The data releases were largely ignored by financial markets where investors remained focused on the fallout from the natural disaster and nuclear crisis in Japan. U.S. stocks trimmed some losses in the afternoon following the Fed statement.
Investors will get another look at the potential for inflation later in the week with reports on producer and consumer prices. Producer prices are expected to rise for an eighth month, though the index is likely to have slowed from January, while the core consumer price measure is expected to slow.
In other data, U.S. homebuilder sentiment in March ticked up to its highest level since May 2010 after stagnating at the same level for four months but was still well below levels regarded as healthy, a survey released on Tuesday showed.
(Additional reporting by Richard Leong in New York and Doug Palmer in Washington)