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 61.4 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 recovery in the sector is both robust and on track," said Ian Shepherdson, an economist at High Frequency Economics.
A gauge measuring orders rose and an employment index topped 60 for only the third time in a decade. 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.
"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.
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.
Solid growth overseas, particularly in developing countries such as China, Brazil and India, has also helped by boosting exports for U.S. manufacturers.