U.S. manufacturing activity pulls back from 2-1/2-year high

By Lucia Mutikani

WASHINGTON (Reuters) - An index of manufacturing activity retreated from a 2-1/2-year high in March amid modest declines in new orders and production, but a surge in manufacturing jobs indicated that the sector's energy-led recovery was gaining momentum.

Other data on Monday showed construction spending rising to a near 11-year high in February amid robust gains in home building investment. The reports pointed to strong economic fundamentals, despite growth appearing to have slowed sharply in the first quarter.

The Institute for Supply Management (ISM) said its index of national factory activity slipped to a reading of 57.2 last month from 57.7 in February, which was the highest since August 2014.

A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy. The manufacturing recovery is being driven by the energy sector as steady increases in crude oil prices boost drilling activity.

A report from energy services firm Baker Hughes on Friday showed U.S. drillers added 137 rigs in the first quarter, the most since the second quarter of 2011. That has fueled demand for machinery, resulting in business spending on equipment rising in the fourth quarter for the first time in a year.

Last month, the ISM survey's production sub-index decreased 5.3 percentage points to 57.6. A gauge of new orders fell to 64.5 from a reading of 65.1 in February. But a measure of factory employment jumped 4.7 percentage points to 58.9, the highest reading since June 2011.

Manufacturers reported paying more for raw materials, more evidence that inflation pressures are steadily building up. A report on Friday showed a key consumer inflation measure in February recorded its biggest annual gain in nearly five years.

The ISM's prices index rose 2.5 percentage points in February to 70.5, the highest reading since May 2011.

The dollar rose against the yen on the data, while prices for U.S. government bonds were little changed. U.S. stocks were trading marginally lower.

In a separate report, the Commerce Department said construction spending increased 0.8 percent to $1.19 trillion in February. That was the highest level since April 2006 and followed an upwardly revised 0.4 percent drop in January.

Economists polled by Reuters had forecast construction

spending rebounding 1.1 percent in February after a previously reported 1.0 percent decline the prior month. Construction spending increased 3.0 percent from a year ago.

In February, private construction spending rose 0.8 percent to its highest level since May 2006 after being unchanged in January. Spending on residential construction surged 1.8 percent to its highest level since July 2007. Investment in homebuilding has now increased for five straight months.

Spending on private nonresidential structures fell 0.3 percent in February, declining for a second consecutive month.

In February, public construction spending rebounded 0.6 percent after three straight months of decreases. Outlays on state and local government construction projects rose 0.9 percent. It was the first increase in state and local government construction spending in three months.

Federal government construction spending fell 2.8 percent after tumbling 5.6 percent in January.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)