Manufacturing growth hits fastest pace since 2011

Manufacturing picked up pace for the third straight month in February, posting the best performance in nearly two years. 

Factory activity grew to 54.2, up from January's 53.1 and the fastest pace since June 2011, after struggling through the second half of 2012, the Institute for Supply Management (ISM) reported on Friday.

The unexpected improvement "suggests that some of the weaknesses experienced in the second half of 2012 are beginning to dissipate, with higher levels of sales and production signaling a pickup in manufacturing activity to begin 2013," said Chad Moutray, chief economist of the National Association of Manufacturers (NAM).

"But there are continuing headwinds including across-the-board fiscal budget cuts, some challenges overseas which could impact export growth and higher energy costs," he said. 

Any reading above 50 indicates expansion. 

The growth was driven by increases in production and new orders, which hit their highest level since April 2011. 

Hiring continued to grow but at a slightly slower pace, dropping to 52.6 from 54.0.

Moutray noted rising prices, with the index for the prices paid for raw materials jumping to 61.5 from 56.5, its fastest pace since this time last year.

The sector, which had led the economic recovery, flagged last summer amid uncertainty about fiscal cliff negotiations and a drop in foreign demand, especially in cash-strapped Europe. 

The sector contracted in November but has improved since then. 

One survey respondent noted the slowdown in defense spending, which contributed to anemic growth of 0.1 percent in the final quarter of last year, the slowest growth in two years. 

The concern could be further exacerbated by $85 billion in spending cuts that went into effect on Friday and could, eventually, lead to furloughs and a drop in spending at the Defense Department.

A transportation equipment producer said "Europe is still a concern in the auto sector" because of continued economic woes. 

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