[sherrferris]

Manufacturing in the U.S. unexpectedly expanded in February at a slower pace than forecast as orders cooled.

The Institute for Supply Management’s factory index dropped to 52.4 from 54.1 in January, the Tempe, Arizona-based group’s report showed today. Readings above 50 signal growth. The median forecast of economists surveyed by Bloomberg News called for a gain to 54.5.

The figure is at odds with regional manufacturing data for the month, showing the factory expansion accelerated. While gains in auto sales and increased exports are contributing to growth in the industry, higher fuel costs and less inventory expansion may be limiting orders.

“With energy prices rising and the lift from inventories fading, there is a good chance growth will slow into midyear,” Aaron Smith, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report.

The median estimate of economists was based on 79 projections in the Bloomberg survey. Estimates ranged from 52 to 56.

The ISM’s production index was little changed at 55.3 from 55.7. The new orders measure eased to 54.9 from 57.6, while the gauge of export orders climbed to 59.5 from 55.

The employment gauge dropped to 53.2 from 54.3 in the prior month.

The index of prices paid increased to 61.5 from 55.5 in the prior month.

Order Backlogs
The measure of orders waiting to be filled was little changed at 52 after 52.5. The inventory index held at 49.5, while a gauge of customer stockpiles dropped to 46 from 47.5. A figure higher than 50 means manufacturers are building stockpiles.

Elsewhere, euro-area manufacturing shrank for a seventh month. A factory gauge based on a survey of purchasing managers in the 17-nation region increased to 49 in February from 48.8 a month earlier, below the 50 line that divides expansion from contraction, London-based Markit Economics said today.

The European manufacturing survey contrasts with reports in China, India and the U.K. showing continued expansion in factory output.

Data from China today showed that a purchasing managers’ index rose for a third month to 51 in February from 50.5 in January. In India, a PMI released by HSBC Holdings Plc and Markit was close to an eight-month high.
Factory Jobs

Less firing and faster job growth in the U.S. are boosting the outlook for spending and production. Payrolls grew by 243,000 workers in January, and the jobless rate fell to 8.3 percent, the lowest since February 2009, the Labor Department said Feb. 3.

Underscoring the strength in manufacturing, factory payrolls jumped 50,000 in January, the most in a year, while the industry’s workers put in the longest workweek on average since January 1998, the Labor Department monthly data showed.

Another survey, from the Institute for Supply Management- Chicago, showed that business activity in the U.S. accelerated in February to the fastest pace in 10 months. The group’s employment gauge climbed to the highest level since 1984.

Vehicle demand is helping drive production. Cars and light trucks sold at a 14.1 million annual rate in January, according to industry data. Excluding a surge in August 2009 tied to the government’s “cash-for-clunkers” program, it was the strongest month since May 2008.

Lull Last year
Manufacturing, which sparked the early stages of the expansion as growing overseas economies propelled exports, has recovered after a lull brought on by Japan’s March 2011 earthquake.

“For many products demand has been above our ability to produce,” Mike DeWalt, director of investor relations at Caterpillar Inc. (CAT), said on a Jan. 26 conference call with analysts. “We have invested in Caterpillar factories in the United States and around the world to increase production.”

Even with planned increases in capital expenditures this year, “we’re still very tight on many products and are currently quoting extended delivery times for them,” he said.

Still, consumer spending is at risk from higher fuel costs. The price of a gallon of regular unleaded gasoline climbed to $3.73 as of Feb. 28, the highest since June of last year, after reaching a 10-month low of $3.21 on Dec. 20, according to AAA, the nation’s largest automobile association.