An uncertain outlook for oil prices appears to be the only cloud on the immediate horizon.
Manufacturers picked up the pace of their rebound in February, boosting production and hiring workers at a faster clip despite the headwinds of higher raw material costs, according to two barometers of business activity.
The Institute of Supply Management (ISM) reported Tuesday that its monthly index of manufacturing activity hit its highest level since May 2004. The index, based on interviews with hundreds of businesses nationwide, was at 61.4 in February, up from 60.8 in January. A reading over 50 indicates economic growth.
A similar study of a nine-state Mid-American region including Minnesota saw an even sharper increase in the rate of growth. That study, overseen by Prof. Ernie Goss at Creighton University, saw its index hit 63.2 in February compared with 58.9 the previous month. It was the highest level for the index since May 2010.
The reports are the latest indications of an economy on the mend from the recession. Last week, the government reported that the economy grew at an annual rate of 2.8 percent in the fourth quarter, the sixth straight quarter of expansion.
Goss said economic strength in the agricultural sector and a weak U.S. dollar that sparked exports were major reasons for the robust activity in February. Firms in nonurban areas reported more hiring than those in urban areas, he said.
Only about 11 percent of the firms surveyed laid off workers in February vs. nearly 20 percent at the end of 2010.
"Oil prices are the economic wild card," Goss said in an interview. Concern over the rise in oil prices resulting from turmoil in the Middle East was the likely reason the Creighton study's confidence index slipped from 74.8 in January to 71.0 in February, he said.
Oil prices already had been climbing before going on a roller-coaster ride sparked by unrest in the Middle East. The same has been true for prices of other commodities. The prices-paid index in the Creighton study shot up from 84.2 in January to 89.2 in February.
The price component in the ISM study in February was the highest since July 2008, with copper, steel, aluminum and corn registering the largest one-month gains. Two-thirds of those surveyed reported paying higher prices for raw materials in February.
Troy Duncan, manufacturing industry leader at Grant Thornton's Minneapolis office, said that for now, he's not worried about rising material costs derailing the economic recovery.
"Manufacturers have been able to pass along their price increases to their customers, where there's a large amount of pent-up demand," Duncan said.
That view was reflected in the ISM study, which found an increased rate of growth in production, new orders and backlog in February compared with January. The weak dollar sparked a higher rate of growth in exports and didn't deter imports, where activity remained basically the same in February compared with the previous month.
Susan Feyder • 612-673-1723