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 the same level in May 2004. The 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 expanded for 19 months.

The rebound in manufacturing is gaining momentum, the report showed. The new orders index rose to a seven-year high. A measure of order backlogs climbed to its highest level in a year. And inventories are shrinking at manufacturers and their customers. All are signs that factory output is likely to keep growing.

“The recovery in the sector is both robust and on track,” said Ian Shepherdson, an economist at High Frequency Economics.

Solid growth overseas, particularly in developing countries such as China, Brazil and India, has also helped by boosting exports. A measure of export orders rose to its highest level in more than 22 years.

And an employment index topped 60 for only the third time in a decade, evidence that manufacturers are adding employees at a rapid clip.

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.

Bloomberg News (2/28, Kowalski) reported that in the US, manufacturing continues to lead the recovery – and blisteringly so — with the Institute for Supply Management-Chicago index rising to 71.2 for February, “the highest level since July 1988, from 68.8 in January” and exceeding “every estimate of economists surveyed by Bloomberg News.” In fact, the index had been expected to fall. At the same time, US households spent less on purchases, “a sign the expansion will become more dependent on gains in factory production.” In addition, “manufacturers like Deere & Co. are raising profit forecasts as business investment in new equipment accelerates and exports climb as the global economy recovers.” Moreover, the Labor Department said factory payrolls were increased “by 49,000 workers in January, the most since August 1998.” The Chicago index is perhaps the most closely watched measure, but “the Fed Bank of New York on Feb. 15 said manufacturing expanded in that region this month.”

Click image below for a video on “Pace of Recovery to Quicken: Bernanke” by CNBC where Fed Chairman Ben Bernanke tells the Senate Banking Committee that the nation’s GDP growth has now matched the pre-crisis peak, reports CNBC’s Hampton Pearson.

Reuters (3/1, Mutikani) also reports the growth in manufacturing activity, also noting that the Midwestern benchmark reached the highest levels in more than 22 years. Reuters says manufacturing activity could help the US ride out fluctuations in oil prices. RBS economist Omair Sharif said, “The data shows that the manufacturing side continues to be extremely solid,” against consumer spending, which likely will be “only a modest driver of growth this year.” Swiss Re’s Kurt Karl said, “The big surprise of this recovery is how strong and how robust the manufacturing sector has been.” Reuters also notes that Fed officials are counseling against much tinkering with economic support yet.

Payroll Tax Cut Fails To Spur Consumer Spending. The AP (3/1, Crutsinger, Pitt) reports a Social Security tax cut “that economists say should help the economy this year is off to a slow start. Consumers increased their spending last month at the weakest pace since June, even with the extra money in their paychecks.” Analysts said “some people may be using the additional money to pay down holiday credit card bills or higher gas prices,” and “harsh weather may have deterred some people from shopping in January.” Consumers “increased spending by only 0.2 percent in January, the smallest gain since June, the Commerce Department said Monday. At the same time, their incomes rose 1 percent – the biggest jump in nearly two years and a reflection of the tax cut.” The increased income “is part of an additional $110 billion that economists say workers will receive this year from the cut in their Social Security taxes.”

The Washington Post (3/1, Mui) reports “rising food and energy prices ate away at the extra money workers received in January from a reduction in the payroll tax, according to government data released Monday, stalling the momentum in consumer spending.” The tax cut “saved workers roughly $66.3 billion and helped boost incomes by one percent in January compared with the previous month, the government data shows. But much of the increase went toward paying for more expensive food and fuel, which together account for about one-fifth of consumer spending, the Commerce Department report said.”

AFP (3/1, Smith) reports “adjusted for inflation, consumer spending — which accounts for about two-thirds of US economic output — actually fell for the first time in a year, by 0.1 percent from the previous year.” Bloomberg News (3/1, Chandra) reports economists “at Morgan Stanley and Deutsche Bank Securities Inc. cut forecasts as the data showed households may have used some of the extra cash from the payroll tax cuts to boost savings.”

SME Daily Executive Briefing

US Manufacturing Remains Strong, Expert Writes.

In an article titled “The Truth About US Manufacturing,” Mark Perry, a professor of economics at the University of Michigan, Flint, and a visiting scholar at the American Enterprise Institute, writes in the Wall Street Journal (2/25, Perry, subscription required) that while some people may believe that manufacturing is on the decline in the US. But the data, Perry writes, shows that manufacturing remains strong in this country. Times are tough for many in the industry, Perry concedes. But he argues that with the proper skills, American workers will still have a place in the new US manufacturing economy.

Kansas City Regional Manufacturing Activity Index Hits Several Highs.

The Kansas City Business Journal (2/25, Dornbrook) reports, “Regional manufacturing activity hit several highs in February, and companies also expect strong activity in the months ahead, according to a survey by the Federal Reserve Bank of Kansas City.” The Kansas City Fed reported “the seasonally adjusted index, which can range from 100 to minus-100, came in at a high of 23,” up from 18 this time last year. “Other measurements also hit highs, with the index reflecting new order volume surging and the employment index swinging to a positive reading.”

SME Daily Executive Briefing, Febr. 25, 2011