Manufacturing at best pace since spring 2011

WASHINGTON (AP) — U.S. factory activity expanded last month at the fastest pace in 2 ½ years, an encouraging sign that manufacturing could lift economic growth and hiring in the coming months.

The Institute for Supply Management, a trade group of purchasing managers, said Tuesday that its manufacturing index rose in September to 56.2, the highest since April 2011. That's up from 55.7 in August and the fourth straight increase in the index. A reading above 50 indicates growth.

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Manufacturers added jobs last month at the fastest pace in more than a year and ramped up production, the survey showed. They also received new orders at a healthy pace, though slower than in August.

U.S. factories are showing signs of picking up after slumping earlier this year. A modest recovery in housing and strong auto sales are pushing up demand for steel and other metals, auto parts, furniture and appliances.

Economists said the strong figures suggest that the annual growth rate in the July-September quarter could be healthier than current forecasts of about 2%. The index has averaged 55.8 in the past three months, up from 50.2 in the April-June quarter.

And the strength at factories has the potential to set the stage for even faster growth in the October-December quarter. Some analysts are forecasting growth at an annual rate of up to 3%.

"Another stronger than expected showing," Jim O'Sullivan, chief U.S. economist at High Frequency Economics, a forecasting firm, said. "The data unambiguously point to a pick-up in the trend in manufacturing output growth."

Manufacturers also kept their stockpiles steady after cutting them for two months. Adding workers and keeping supplies on hand are signs of increased confidence and higher production ahead, economists noted.

Still, the growth at factories could be offset by the partial government shutdown that began Tuesday. ! Late Monday, Congress and the White House couldn't agree on a spending measure to keep the government open.

Bradley Holcomb, chairman of the ISM's survey committee, said that survey respondents weren't worried about a possible shutdown last month, but would likely begin to raise concerns if it lasted for long.

Most economists say that a shutdown of a just a few days would have little economic impact. But if dragged on for two weeks, it could shave about 0.3 percentage points from fourth-quarter growth.

Factories had been hampered by weak growth overseas that lowered demand for U.S. goods. But exports grew last month, though at a slower pace than August. Europe's economy is slowly recovering after an 18-month recession and Japan is also growing faster after two decades of stagnation.

Earlier this month, the Federal Reserve said manufacturers boosted their output in August by the most in eight years. The gains were driven by a robust month at auto plants.

Still, other data has been mixed. Companies placed only slightly more orders for long-lasting manufactured goods in August after a sharp fall in July. But demand for so-called core capital goods rose 1.5%, after falling 3.3% the previous month. Core capital goods are a good measure of businesses' confidence in the economy and include items that point to expansion, such as machinery and computers.