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Factories Hire, But Inflation Fears Loom

By Amanda Cooper

NEW YORK (Reuters) - U.S. industry flourished in March as hiring reached the highest level since late 1987, but manufacturers were concerned over the high cost of raw materials and a weaker dollar, a report showed on Thursday.


The Institute for Supply Management said the factory sector chugged along at its best clip in nearly 20 years in March.


The employment component of ISM's nationwide manufacturing survey shot up last month, confounding expectations of a pull-back. A separate Labor Department (news - web sites) report said new claims for unemployment benefits slipped last week, adding to hopes that Friday's March employment report will show employers are finally hiring.


The surprisingly large increase in factory employment stoked expectations for a bigger rise in workers on U.S. payrolls, which battered Treasuries and boosted Wall Street stocks and the dollar.


"With the payroll number coming out tomorrow there's probably anticipation that maybe the expectations for payroll growth could be a little too low right now," said Gary Thayer, chief economist at AG Edwards & Sons in St. Louis.


Economists polled by Reuters are forecasting a modest rise of 103,000 in Friday's payrolls report, having been caught off guard for months on end by weaker-than-expected gains.


The headline ISM manufacturing index rose to 62.5 in March from 61.40 in February, marking the 10th monthly expansion and outstripping analysts' expectations of a fall to 60.0.


JOBLESS CLAIMS FALL


Separately, the Labor Department said first-time claims for state unemployment insurance slipped 3,000 to 342,000 in the week ended March 27 from a revised 345,000 the prior week, suggesting mild improvement in the labor market.


Economists had forecast claims to rise by 1,000 from the 339,000 initially reported for the March 20 week. The upward revision to the March 20 figures reflected the impact of annual changes in how the data is adjusted for seasonal variations.


However, analysts said that given that the revisions were made to the figures for the week in which the monthly payrolls survey is conducted, this would support a bigger rise in payrolls than previously expected.


Another report showed U.S. wholesale prices barely moved in February, but the ISM's prices paid index rose to 86.0 in March from 81.5 the previous month as a result of soaring basic materials and high energy prices.


U.S. stocks (^DJI - news) (^IXIC - news) rallied on the data, which painted a picture of job creation consistent with economic growth of near 4.0 percent, and gradually rising inflation, the two factors the Federal Reserve (news - web sites) says would merit a rate rise.


"The implication is that manufacturing is racing ahead a lot faster than people give it credit for and that's no April fool's joke," said Ken Mayland, president of Clearview Economics in Pepper Pike, Ohio. "A cyclical rebound of manufacturing is swamping outsourcing, but all this comes at a price and the price is higher prices."


PRICES STALLED IN FEBRUARY


The Labor Department said a sharp slowdown in energy price gains and a fall in the cost of light trucks helped keep wholesale prices under wraps in February, although this trend seemed to reverse in March, according to the ISM report.


"We have some real challenges when it comes to materials. We have a lot of metals on the short supply list. This has kind of caught everybody," said Norbert Ore, head of the ISM survey committee.

The Producer Price Index (news - web sites), which measures prices paid to farms, factories and refineries, rose just 0.1 percent in February. The increase marked a sharp slowdown from January's 0.6 percent rise and came in well below the 0.4 percent advance expected on Wall Street.

Excluding food and energy, producer prices rose by 0.1 percent, versus January's 0.3 percent gain.

The PPI (news - web sites) report showed energy costs rose 0.2 percent in February after a steep 4.7 percent climb a month earlier. While energy prices moderated, food prices rose 0.2 percent after a 1.4 percent plunge in January.

Some economists have expressed concern that sharp increases in commodity prices are offering an inflation warning sign. Others say inflation at the retail level is unlikely to flare while the U.S. labor market is still quite weak, although Thursday's report could eventually cancel out this argument.

Higher raw material prices and a slow-down in residential building also caused spending on new construction to ease in February, the U.S. Commerce Department (news - web sites) said.

It said total spending fell 0.1 percent to a seasonally adjusted annual rate of $921.11 billion from a downwardly revised $922.23 billion in January, marking the second monthly decline.


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