American factories expanded in February at the fastest pace in almost two years, spurred by a jump in orders that is helping propel an economy about to be tested by federal government cutbacks.

The Institute for Supply Management’s factory index rose to 54.2, the highest reading since June 2011, the Tempe, Arizona- based group said Friday. Other data showed consumer spending rose in January even as incomes plunged, and household confidence climbed last month.

Companies such as Applied Materials Inc. are benefiting from growing demand as businesses boost spending and economies in emerging markets pick up. Combined with a rebound in housing and sustained gains in household purchases, the factory gains will help lift growth, after the economy stagnated in the fourth quarter, even as across-the-board budget cuts set in.

“The data continue to be consistent with a moderate recovery,” said Dean Maki, chief U.S. economist in New York for Barclays Plc. “Production is picking up and that is a key reason why we think growth will be stronger in the first quarter. Underlying all this is a pretty steady pace of consumer spending. Auto sales and housing are quite solid right now. The economy can withstand some fiscal tightening without going into recession.”

Personal spending rose in January even as incomes dropped by the most in 20 years, a report from the Commerce Department showed. Household purchases, which account for about 70 percent of the economy, climbed 0.2 percent after a 0.1 percent gain the prior month. Incomes slumped 3.6 percent, sending the saving rate down to the lowest level since November 2007. 

(Bloomberg)