By Ken Christensen

Expansion in the U.S. manufacturing sector unexpectedly slowed in February, according to Thursday’s report by the Institute for Supply Management.

After four consecutive months of accelerating growth for the nation’s factories, the monthly index dropped to 52.4 from 54.1. Any number above 50 indicates expansion, which means that manufacturing grew last month, but at a slower rate than in January. The slight reversal is a reflection of rising prices of raw materials and an overly strong finish to 2011.

Almost one-third of survey respondents said they paid more in February for production supplies, including commodities such as oil, copper and zinc. Some factories absorb these additional input costs by profiting less. But for some finished goods, higher production prices translate to higher consumer prices.

“Some of these costs will be passed along to consumers,” said Nathaniel Karp, chief economist of BBVA.

Increasing prices foreshadow weaker consumer demand. In anticipation, businesses may buy less from factories.

Higher gas prices also restrict the amount U.S. households can spend. When adjusted for inflation, consumer spending has been relatively flat since October. An overall lack of household demand, coupled with uncertainty about Iran and other geopolitical issues limiting the world’s oil supply, explain why manufacturers placed fewer orders for production materials in February.

Across the country, there was slightly less growth in factory output, hiring and new supply orders.

When buyers for factories order fewer supplies, it’s a sign that growth in national output will continue to slow in coming months. Karp said the slowdown is a natural response to excessive build-up in inventories during the fourth quarter of 2011. Like many economists, he thinks the manufacturing sector’s streak of growth is bound to slow as it nears pre-recession size and output.

Still, the index number surprised some economists because of regional numbers released two weeks ago. Regions such as New York, Philadelphia and Chicago, which help economists predict nationwide manufacturing trends, experienced more expansion in February than in January.

Nationwide, new orders by other countries grew at their fastest rate since last April, the peak month in 2011. Export orders increased for the fourth consecutive month, as emerging markets in Latin America and Asia compensated for a lack of demand from European countries.

“One hypothesis is that there’s slower growth in the rest of the world,” said Jay Bryson, a global economist at Wells Fargo. “But the new export orders kind of throw cold water on that theory.”

Though disappointed, economists said the contraction in growth was mild. The manufacturing sector is an important part of the U.S. recovery. Annualized, index readings above 50 are associated with an increase in GDP of at least 2.5 percent.

“The headline of 52.4, that’s still pretty well into expansion territory,” Bryson said.


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