Pace of US manufacturing hit 2-year peak

US factories expanded last month at the fastest pace since June 2011 on a jump in orders. And a new report signals that manufacturing output could strengthen in coming months.

The Institute for Supply Management, a trade group of purchasing managers, said Tuesday that its manufacturing index rose to 55.7 in August from 55.4 in July. That topped the index's 12-month average of 52. A reading above 50 indicates growth.

A gauge of new orders rose nearly five points to 63.2, the highest level in more than two years. At the same time, production increased more slowly than in July, and factories added jobs at a weaker rate. Despite the drop, production reached its highest level in 2 years.

The overall improvement contrasts with other recent reports that had pointed to a slowdown in manufacturing. The ISM's survey found broad-based growth, with 15 out of 18 industries reporting expansion and only one reporting contraction. That suggests that factory production could accelerate this year.

"The data unambiguously point to a pickup in ... manufacturing output growth after a weak" second quarter, Jim O'Sullivan, an economist at High Frequency Economics, said in a note to clients.

The Federal Reserve will closely examine Tuesday's report, which comes two weeks before Fed policymakers will decide whether to slow their bond-buying program. Chairman Ben Bernanke has said the Fed will scale back its purchases this year if the economy continues to strengthen. The $US85 billion in monthly bond purchases have been intended to keep interest rates low.

The jobs report for August, to be released Friday, is the most important remaining economic report the Fed will consider.

Orders from overseas also rose, a sign that improving economies in Europe and China may be boosting US manufacturers. The 17 countries that use the euro grew in the April-June quarter after six quarters of recession.

And a private survey of purchasing managers in China found that manufacturing in that country expanded for the first time after shrinking for three months. It added to other recent evidence that China's economy is stabilizing after a slowdown.

Last month, a Fed report found that factory output dipped in July. But that slip reflected a slowdown in auto production, which many analysts expect to be only temporary.

Companies also cut back in July on orders for long-lasting U.S. factory goods, according to a government report last week. That drop was driven by a sharp fall in demand for commercial aircraft, a volatile category.

But businesses also sharply reduced their orders for capital goods such as computers, electrical equipment and other items. That decline may signal that business investment, an important driver of the economy, could slow.

The economy grew at a modest 2.5 percent annual rate in the April-June quarter, the Commerce Department estimated last week. That was better than the government's initial estimate of 1.7 percent.

But many economists now think the economy could slip a bit in the July-September quarter to a 2 percent annual growth rate or less.